The good news for the home buyers is that banks have started cutting home loan rates. Banks are flush with the funds, as the credit offtake has slowed down, coupled with strong growth in deposits. So, this is forcing them to cut lending rates on home loans, where the default rates are the lowest among all segments.
HDFC Bank cut its home loan rate by 35 basis points, to 9.35%, which is sure to force other banks to follow suit. There is expectation that by the end of the current year, rates may fall by 1.5-2 percentage points, as banks are flush with funds and credit off take is very sluggish on account of a subdued economy, a senior banker said.
Any reduction in rates would prove a booster for the sector. As shown in the chart, a 1 percentage point reduction in the rate, from existing 10% to 9%, will lower the EMI on a 20 year loan by 6.8%! This is as effective as prices falling by the same amount. If the rate falls by 2 percentage points, the EMI will be reduced by 13.3%! While banks argue that the costs of their existing funds are high, they are also resorting to cuts on deposit rate at the same time, as they are flush with funds - Canara Bank has already done just that.
This will prepare the ground for other banks to cut lending rates after the expected cut in policy rates by the RBI in its next review of credit policy on September 29.
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