Home Loan Rates Poised to Dip Following RBI Policy Change
Home loan interest rates in India are anticipated to decrease to around 7.1%, a level reminiscent of the Covid-19 pandemic period. This follows the Reserve Bank of India's (RBI) monetary policy committee's decision to reduce the repo rate by 25 basis points, bringing it down to 5.25%.
Banks Set to Lower Rates
Several banks, including Union Bank, Bank of India, Bank of Maharashtra, and Indian Overseas Bank, currently offer home loans at 7.35%. Borrowers with these banks could see their interest rates fall to 7.1%.
Impact on Borrowers
A 0.25 percentage-point reduction in the interest rate on a โน1 crore home loan for a 15-year term translates to a decrease of approximately โน1,440 per month in the Equated Monthly Installment (EMI).
Challenges for Lenders
For banks to offer home loans at 7.1% to new borrowers, they may need to:
- Sharply reduce deposit rates
- Revise the spread over the benchmark rate
If these adjustments are made, new borrowers might potentially end up paying more interest than existing floating-rate borrowers.
NBFCs to Benefit
While banks may experience a compression in net interest margins until deposit rates decrease, Non-Banking Financial Companies (NBFCs) are expected to benefit immediately from lower funding costs.
Umesh Revankar, Executive Vice-Chairman of Shriram Finance, stated that the RBI policy is a "significant enabler" for the NBFC sector. He emphasized that the neutral stance and the โน1 lakh crore OMO purchase announcement will ensure sufficient liquidity, facilitating faster transmission of rate cuts to the grassroots level, benefiting small truck operators, rural entrepreneurs, and MSME borrowers.
Shift Towards Granular Credit
Bankers suggest that the reduction in lending rates will encourage lenders to pursue greater granularity in credit, focusing on small-business loans that offer higher returns. Large corporations are increasingly raising funds outside the banking system through equity and bonds, leading to MSME and retail segments driving credit growth.
Cautious Lending Practices
Despite the push for higher-yielding loans, lenders remain cautious about potential defaults. RBI data indicates a shift towards secured loans, such as gold and auto loans, and away from unsecured personal loans.
