It may be a competitive market out there but bankers aren’t about to drop home loan rates to levels where they could get singed. Both State Bank of India (SBI) and ICICI Bank have priced their products competitively to be able to attract customers but also prudently enough by increasing the spread or the risk premium over the base rate.
Indeed, both SBI and ICICI Bank have made sure they’re not outpriced by Housing Development Finance Corporation (HDFC), which is the second biggest player in the mortgage market with a share of 18%. After the latest round of rate-tweaking, buyers shopping at SBI can get themselves a home loan at 9.55% while those borrowing from HDFC and ICICI Bank must pay 9.65%. Existing customers will gain from the cuts in the base rates — 40 basis points by SBI and 35 basis points by ICICI Bank.
Earlier, SBI offered home loans at a spread of just 5 basis points above the base rate so customers were paying 9.75%. This time around, the spread is a good 25 basis points and so customers will need to pay 9.55% since the base rate is now 9.3%. ICICI Bank too has increased the spread by 10 basis points to 30 basis points so customers must fork out 9.65%.
An SBI executive overseeing the home loan portfolio explained that in the recent past the bank has tried to retain a spread of 25-30 bps for home loans. However, in a bid to spur demand at a time when interest rates were relatively high last year, the bank had compressed its spreads to just 5 basis points. In 2011 and 2012 the spread was as high as 100 bps above the base rate at 10.25% for a home loan of Rs 30 lakh.
Analysts say SBI, whose domestic net interest margin fell 25 bps sequentially to 3.29% in the three months to June, is trying to protect its margins. SBI’s home loan portfolio stands at Rs 1.64 lakh crore while HDFC’s individual home loan book is slightly smaller t Rs 1.59 lakh crore.
According to data from Icra, the top five lenders in terms of market share are SBI and its subsidiaries (19%), HDFC Group (18%), LIC Housing Finance (9%), ICICI Bank (9%) and Axis Bank (5%).
HDFC, which prices home loans over a retail prime lending rate (RPLR), is hamstrung because it doesn’t have access to low-cost deposits the way banks do. The mortgage lender has reduced its RPLR by 25 bps, pricing home loans for new customers at 9.65%. HDFC has gained market share of close to 40 basis points between FY13 and FY15; Kotak Institutional Equities believes the housing finance market will grow at 16-17%, significantly faster than the banking system. The housing loan market in India — including priority sector loans — is valued at Rs 6.74 lakh crore, according to Reserve Bank of India (RBI) data.
Vibha Batra, senior vice-president, Icra, said that since mortgage finance market is very competitive and there is no pre-payment penalty, “large players, very close in terms of market share, will have to present competitive rates to the customers to maintain their market position”.