Lending rates cut leads to balance transfers in home loan market: ICRA

Kolkata, Jan 11 (IANS) The lending rates cut, which effectively set off a price war in the Rs 13 trillion home loan market, could lead to increased competition and balance transfers in the highly competitive housing loan market, rating agency ICRA said in its report.

With a bulk infusion of fresh liquidity arising out from the demonetisation, State Bank of India reduced the lending rates for home loans by 50 bps to 8.6 percent (for floating rate loans), various lenders followed suit.

Key lenders that together account for over 65 percent of the home loan market, now offer interest rates in the range of 8.5-8.7 percent after the reduction, compared with their earlier rates of 9.1-9.3 percent, the agency said.

"While the reduced rates are applicable for new loans and loans linked to Marginal Cost of Funds based Lending Rate (MCLR), this could lead to increased competition and balance transfers in the highly competitive Indian housing loan market, especially the prime salaried segment," the report said.

Loans linked to MCLR for banks were less than 15 percent of the overall home loan book, it said.

The report said lenders might also try to retain borrowers by giving them the option to shift to a lower interest rate by paying a fee.

Housing finance companies (HFCs) would also benefit from the reduction in MCLR by various banks and should be able to re-price a portion of their liabilities.

However, the report said the smaller HFCs are likely to get impacted more on account of their relatively higher operating cost ratios.

"Given that only a few HFCs would be able to match the interest rates being offered by banks , this could lead to some balance transfers from HFCs to banks and hence an increase in banking sector market share," the report added.