Home loan rates to harden as banks feel crunch

The days of cheap home loans are drawing to a close as the Reserve Bank of India prepares to harden its key policy rates. Large public sector banks, such as the State Bank of India and Punjab National Bank, are reportedly planning to withdraw the special schemes that offer rates as low as 8 per cent for the initial years.

With the RBI sending out signals of a tighter monetary policy, banks may have to raise their home loan rates by January. Moreover, listed Indian banks may have to shell out more than Rs11,000 crore in the next one year to improve their cover towards non-performing assets to 70 per cent, as mandated by RBI's recent monetary policy.

"Seeing the hawkish tone in RBI's quarterly monetary policy review, the bank board thinks it may not be possible to continue with these schemes after the end of the current calendar year," The Economic Times quoted an unnamed senior official with PNB, the country's second-largest public sector lender, as saying.

While the special offers will be withdrawn from the end of the current calendar year, most banks are extending the festival offers, such as a zero processing fee, till then.

Currently, various banks are offering teaser rates for the first few years on home loans. Development Credit Bank is offering 7.95 per cent rate for the first year on their home loans. SBI, Dena Bank and Canara Bank are currently offering 8 per cent rate for the first few years.

After the offer period, such loans will be converted into floating rate loans.

Private sector banks, which were forced to offer lower rates after the announcement of special schemes by their state-owned rivals, are likely to hike rates once the public sector banks withdraw such schemes. Considering the fact that floating rate loans comprise a large part of the housing loan segment, any increase in rates will affect a large number of existing loans as well.