Demand for Home Loans Disappointing Despite Cheaper Interest Rates
May 18, 2017 Home Loan
The ailing real estate sector in the country got some timely boosts in 2016. While the demonetization played its role in stabilising the otherwise highly volatile property prices, the introduction of RERA is yet another attempt by the government to protect home buyers and push them towards investing in property. Moreover, markets also witnessed a reduction in lending rates by major banks consistently throughout the year.
2016 saw major lending institutions including SBI and ICICI introducing several housing finance schemes while offering loans on the property for as low as 8.9 percent interest. However, statistics suggest a different picture. While the interest rates on home loans have fallen by roughly 50 basis points in the current fiscal, the demand for home loans has been largely underwhelming.
Repo rate cut by 50 bps in FY2016:
The Reserve Bank of India made a reduction of 50 basis points in the repo rate in 2016. For starters, the repo rate is the rate at which RBI lends money to banks in case of a shortfall. The benefits that banks gain due to falling in repo rate is generally passed to the new home loan customers. However, the current year saw less transmission as commercial banks did not pass the benefits to the home loan borrowers and thus keeping the home loan costly in the process.
Marginal Cost based lending rate (MCLR) introduced:
The current fiscal saw the introduction of a new benchmarking rate, namely, MCLR or marginal cost based lending rate. This is the benchmark at which banks will lend money to potential loan borrowers. Previously, all floating based home loans were linked to base rates. The MCLR comprises of 4 core components: Marginal cost of funds, Negative carry on account of cash reserve ratio (CRR), Operating costs and Tenor premium. The implementation of MCLR resulted in a reduction of 40 basis points in home loan rates.
Updation of fees charged by banks:
Several fees and charges against home loans have been updated lately. Previously, banks used to charge around 0.50 percent of the home loan amount as service charges. Now most of the major lending institutions have been charging a flat amount as service charge which generally ranges from 15,000 to 20,000 INR.
Going Digital:
Several leading institutions have started realising the potential of online services and as a result, most of them have collaborated with online portals such as Bankbazaar, Paisabazaar to get more customers on board. As a result, applications for loans through online channels is all set to increase in the near future.
Forecast:
What next for financial institutions? Even though the current fiscal saw home loans getting cheaper, the demand was largely underwhelming. Financial experts indicate fewer demands for home loans to continue till 2nd quarter of the next fiscal. However, once the demonetization drive’s impact nullifies, loan demand will revive. Fall in inflation will further help in reduction in lending rates.
2016 saw major lending institutions including SBI and ICICI introducing several housing finance schemes while offering loans on the property for as low as 8.9 percent interest. However, statistics suggest a different picture. While the interest rates on home loans have fallen by roughly 50 basis points in the current fiscal, the demand for home loans has been largely underwhelming.
Repo rate cut by 50 bps in FY2016:
The Reserve Bank of India made a reduction of 50 basis points in the repo rate in 2016. For starters, the repo rate is the rate at which RBI lends money to banks in case of a shortfall. The benefits that banks gain due to falling in repo rate is generally passed to the new home loan customers. However, the current year saw less transmission as commercial banks did not pass the benefits to the home loan borrowers and thus keeping the home loan costly in the process.
Marginal Cost based lending rate (MCLR) introduced:
The current fiscal saw the introduction of a new benchmarking rate, namely, MCLR or marginal cost based lending rate. This is the benchmark at which banks will lend money to potential loan borrowers. Previously, all floating based home loans were linked to base rates. The MCLR comprises of 4 core components: Marginal cost of funds, Negative carry on account of cash reserve ratio (CRR), Operating costs and Tenor premium. The implementation of MCLR resulted in a reduction of 40 basis points in home loan rates.
Updation of fees charged by banks:
Several fees and charges against home loans have been updated lately. Previously, banks used to charge around 0.50 percent of the home loan amount as service charges. Now most of the major lending institutions have been charging a flat amount as service charge which generally ranges from 15,000 to 20,000 INR.
Going Digital:
Several leading institutions have started realising the potential of online services and as a result, most of them have collaborated with online portals such as Bankbazaar, Paisabazaar to get more customers on board. As a result, applications for loans through online channels is all set to increase in the near future.
Forecast:
What next for financial institutions? Even though the current fiscal saw home loans getting cheaper, the demand was largely underwhelming. Financial experts indicate fewer demands for home loans to continue till 2nd quarter of the next fiscal. However, once the demonetization drive’s impact nullifies, loan demand will revive. Fall in inflation will further help in reduction in lending rates.
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