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Banks to Withdraw Low Rate Home Loan Schemes Very Soon
Source: Indian Realty News Feb 13, 2010
The special invitational or teaser rates for new home loans which were less than those offered to earlier customers are set to be withdrawn. This means a hike of up to 2% in interest rates offered by both private and public banks in the next one month. The withdrawal of the offers, which typically cover the first couple of years of a loan, are in step with a gradual rollback of incentives related to the slowdown that affected the economy in 2008-09 and also aim at adhering to Reserve Bank of India's view that banks should not discriminate against older customers.

The apparent lack of transparency on the part of banks came up at a meeting of top bankers on Thursday with the central bank as part of RBI's post-policy review meeting. RBI had in a January 22 communiqué asked the Indian Bank Association (IBA), the umbrella body of all commercial banks, why the lower rate of interest for new loan accounts could not apply to existing customers. To avoid joining issue with RBI, most commercial banks, sources said, have decided to exit their special home loan products that solicited customers at a lower rate of interest - as low as 8%, much below their prime lending rates (PLR).

The first to exit the easy home loans rates segment is Union Bank of India which has already communicated to all its branches that the special product offering home loans at 8% stands withdrawn from February 15, 2010. Sources said by March, all other banks are likely to withdraw their special products, offering discounted interest rates much below their PLR.

Speaking on the same, Indian Bank Association chairman and CMD of Union Bank of India M V Nair said his bank had decided to exit from the special offer where new customers were offered home loans at lower interest rates. He said currently "we were offering special rates at a discount on our PLR which is at 11.75%". Once this offer is withdrawn and UBI brings down PLR by around 2%, there would be no gap and this fits in with the central bank's directive of having a common base rate. This implies that home loan interest rates may go up to 9%-10%.

"We and the RBI are on the same side and can never be at loggerheads," Nair said, and confirmed that the central bank in its communication had asked banks to bring in transparency with regard to home loans. "We agree with that," he said, adding that the IBA was in agreement with the central bank directive whereby banks have been asked to be non-discriminatory to new and existing customers.

The move by banks to raise their interest rates is also in line with the RBI asking banks to follow a common Base Rate system that should replace their existing PLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the base rate. Base rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own base rate, some of the criteria that could go into the determination of these rates are cost of deposits and adjustment for the negative carry in respect of CRR and SLR. Chanda Kochhar, CMD of the largest private sector bank, ICICI Bank, refused to comment when asked if her bank was also raising interest rates. O P Bhat, CMD of SBI, was unavailable.

Tag: Real Estate India, Home Loans, All India Properties
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