Banks up home loan EMIs to pass on rate hike

Mumbai, July 26 | Updated: Jul 27 2006, 05:30am hrs
Caught in a regular rising interest rate scenario, banks and housing finance companies are adopting multiple strategies to pass on the effect of the rate hike to customers. They are now increasing the equated monthly instalments (EMIs) of their floating rate home loan customers, while reducing the tenure of the loan period.

This is against the earlier practice of extending the tenure of the loan and keeping EMIs unchanged. ICICI Bank has sent letters to about 20% of floating rate home loan customers, informing them that the EMI has been hiked and either the tenure has been kept constant or reduced.

Explaining the rationale behind increasing the EMI and reducing the tenure, Vishakha Mulye, chief financial officer, ICICI Bank, said, We studied the operating life cycle of our home loan customers and identified a few customers whose loan tenure exceeded their earning life period. Hence, there was a need to pass on the effect of rate hike by increasing the EMI of the loan, so that they can service the loan within their earning period. We also had to reduce the tenure for the same reason.

However, in case the customer prefers to keep the EMI at the existing level and maintain the tenure of the loan, they have also been given the option of making a part pre-payment of the loan to bring down the principal outstanding. HDFC has also adopted a similar practice for a small percentage of their floating rate customers.