Banks persist with hybrid loans despite poor response

Written by Vishwanath Nair | Mumbai | Updated: Dec 7 2012, 06:16am hrs
Banks and housing finance companies (HFCs) can't seem to let go of their fixed-cum-floating home loan products, despite waning customer interest. The reason, they say, is that there is always a section of the customers that likes to play it safe and opt for such a hybrid rate product instead of a fully floating one.

However, analysts believe otherwise. In a hybrid rate loan, the customer is charged higher interest rates during the fixed period. Last year, customers thought they would escape the volatility in interest rates by locking themselves with these hybrid products, while lenders started cutting home loan rates this year. Hybrid loan customers were not able to take benefit of these cuts, said an analyst from a local brokerage.

Recently, many public sector banks reduced rates on home and other retail loan products in the festive season. Customers who had opted for a hybrid product late 2011 would not be able to take advantage of these reductions. New borrowers are, therefore, preferring to go for fully floating loans.

ICICI Bank, launched a dual rate home loan product for its customers in August last year. Last month, the bank modified this product in such a way that customers could renew the home loan to a complete fixed rate one after the initial fixed period was completed. An email query to ICICI Bank regarding the performance of this product remained unanswered.

Axis Bank had launched a fully fixed rate home loan product, Nishchint, in September last year, where customers could get home loans at a fixed rate of 11.75% for the entire 20 years of the loan duration. Sources say the product used to contribute nearly 10% of the bank's total home loan portfolio in the previous year. However, now the demand from customers has come down in a big way.

Housing finance companies like HDFC, LIC Housing Finance and Edelweiss Housing Finance, too, launched hybrid products last year, which they are yet to withdraw.

The hybrid product never really took off and we received very marginal response, since most people are still expecting rates to come down. But we did not discontinue it since it helped us complete the portfolio of products to our customers, said an official of a housing finance company, requesting anonymity.