Banks have cut home loan rates by more than the Reserve Bank of India’s latest 25-basis-point repo rate reduction, underscoring the intensity of competition in the segment even as lenders continue to flag constraints on broader rate transmission. Union Bank of India and LIC Housing Finance have reduced home loan rates by 30 bps and 35 bps respectively, overshooting the policy easing.
“The market’s competitive positioning is reflected in the sharper-than-repo reductions; public sector lenders typically move more quickly on pricing because of their funding profiles, private banks take a more calibrated approach to balance growth, margins and non-bank lenders continue to be selective given their cost of funds,” Vikram Singh, executive director at Urban Money said.
Bankers argue that the sharper cuts should not be read as a sign of falling funding costs. The pace of transmission, they say, varies sharply depending on the benchmark to which loans are linked. Loans linked to the repo rate or the external benchmark lending rate (EBLR) transmit almost immediately following a policy move, as these are contractually tied to the RBI’s repo rate. In contrast, marginal cost of funds-based lending rate (MCLR)-linked loans depend on banks’ actual cost of funds, which remain elevated.
RBI Deputy Governor Swaminathan J had earlier highlighted this divergence in transmission, noting in February that around 40% of the home loan book linked to the external benchmark lending rate (EBLR) sees an immediate impact from repo rate changes, while a similar share linked to MCLR typically takes about two quarters to reflect policy moves due to reset periods of around six months.
Transmission Gap
“MCLR has not fallen in line with cumulative repo cuts as banks’ cost of borrowing has not declined meaningfully,” said a senior bank official. Fixed deposit rates have remained sticky due to intense competition for deposits and concerns around durable liquidity. While system liquidity conditions may appear comfortable intermittently, bankers remain cautious about cutting deposit rates aggressively in the absence of sustained, long-term funding comfort. As a result, meaningful transmission through MCLR is expected only over the next one to two quarters.
The aggressive pricing seen in home loans, therefore, reflects a conscious trade-off rather than improved balance-sheet conditions. Data from JM Financial shows that while growth in outstanding home loan portfolios continues to moderate, disbursement momentum has picked up, intensifying competition for new borrowers. Home loan disbursements grew 11% year-on-year in value in the first half of FY26 and 14% in the September quarter, compared with just 3% growth in FY25, driven by a recovery in volumes.
At the same time, growth in outstanding home loan portfolios slowed to 11% in the September quarter from 13% in FY25, indicating that lenders need stronger fresh originations to sustain overall growth. This divergence has sharpened competition and has increasingly tilted in favour of PSU banks. JM Financial data shows that public sector banks’ (PSU Banks) share of home loan origination value rose to around 50% as of the September quarter, from about 43% in FY25. In contrast, private banks saw their share decline to about 25%, while housing finance companies ceded around 140 basis points of market share over the same period. Analysts attribute the shift largely to aggressive pricing by PSU banks, forcing peers to respond.
Battle for Big Tickets
Another factor enabling sharper competition is the changing composition of home loan demand. Loans above Rs 75 lakh now account for nearly 40% of total disbursement value, reflecting consumer preference for larger homes amid rising property prices. In contrast, growth in the affordable housing segment has remained muted. Higher-ticket loans typically exhibit better credit profiles, offering lenders greater comfort to compete aggressively on rates.
“Banks do look at balance transfers, though generally the ticket size tend to be higher and they target customers with high credit scores, however, in case of smaller ticket loans, banks may target the same to meet their priority sector loan requirements,” Sachin Sachdeva, Vice President-Financial Sector Ratings at ICRA said.
Asset quality trends in the housing segment have remained broadly stable or improving, particularly for PSU banks, with stress largely confined to very small-ticket loans. This has reinforced lenders’ willingness to use housing loans as a customer acquisition and market-share defence tool, even at the cost of near-term margin pressure.
The divergence between selective rate cuts in housing loans and the cautious approach to balance-sheet-wide repricing highlights the tightrope banks are walking — supporting growth and defending market share in a slowing system, while protecting margins in an environment where funding costs are yet to ease meaningfully.