Will SBI, ICICI Bank Spark-Off A Home Loan Rate War?

State Bank of India and ICICI Bank Ltd. are looking to cash in on festive season demand by offering lower rates and new schemes to home loans customers. If other banks follow suit, this could very well spark off a rate war in the fast-growing and low-risk market for home loans.

The cut in home loan rates is linked to a reduction in the marginal cost lending rate (MCLR) by both banks at the start of the month. Under the new MCLR framework, banks reset their rates monthly based on the change in their marginal cost of funds.

State Bank of India slashed interest rates by 0.15 percent to 9.15 percent per annum for home loans up to Rs 75 lakh, India's largest lender said in a press release. Women borrowers will pay a lower 9.10 percent interest under the scheme. This is marginally lower than the 9.2-9.25 percent charged by ICICI Bank.

SBI has also waived off any processing fee on home loans as part of its year-end offer. The scheme will be in effect from November 1 till the end of the year.

ICICI Bank has taken a slightly different approach.

The private lender has launched a home loan overdraft facility, which allows salaried customers to take personal loans of up to Rs 1 crore against their property.

The ‘ICICI Bank Home Overdraft' offer gives customers the dual advantage of a term loan and an overdraft facility, the bank said in a press release. Customers can avail a minimum of 10 percent of the total amount as a term loan and a maximum of 90 percent as an overdraft.

While equated monthly installments will be applicable for term loans, interest will be charged for overdraft only on the utilised amount for the time period for which the funds are used. Only salaried individuals with a salary account and home loan in ICICI Bank are eligible to apply for the scheme. There's also a provision for salaried borrowers of “preferred corporates” who do not have home loans with ICICI Bank to transfer their home loans to the bank and avail of the offer, ICICI Bank added.

Home Loans Growing At A Steady Clip

The new offers come against the backdrop of steady growth in the home loan segment.

Reserve Bank of India data shows that housing loans rose 18 percent between September 2015 and 2016, making this one of the fastest growing loan segments. Overall credit growth for the banking sector has remained close to 10 percent.

Apart from home loans, segments like credit cards and auto loans have been growing rapidly. Most of these, however, tend to have higher default rates than the home loan category.

Pressure On Housing Finance Companies

According to Religare, schemes from SBI and ICICI Bank could lead to more aggressive competition in the home loan market, putting pressure on housing finance firms.

Banks are presently better placed to offer lower rates compared to housing finance firms. Banks have raised significant amounts through infrastructure bonds, which may give them a cost advantage, said the brokerage house.

While government bond yields have fallen substantially this year, yields have started to inch up in recent weeks. With domestic monetary policy factored into the bond markets and global markets turning nervous ahead of a possible interest rate hike from the US Federal Reserve, yields may not fall much further.

This could limit the room for housing finance firms, which are dependent on market borrowings, to cut rates.

“We expect wholesale funding cost to dip over the next couple of years, but in a slow and gradual manner, unlike the quick downshift seen in the last one year, limiting the lower cost-of-fund benefit for HFCs,” said Religare.

The report expects margin and growth pressures to weigh on housing finance companies in the near to medium term.