Banks are stepping up efforts to draw in homebuyers and are cutting home loan rates by more than the Reserve Bank of India’s recent 25 basis point (bps) repo cut. The latest reduction signals a clear push to stimulate demand in a competitive market, with Union Bank of India lowering home loan rates by 30 bps and LIC Housing Finance by 35 bps, indicating that lenders are willing to ease pricing to capture new borrowers.
“The market’s competitive positioning is reflected in the sharper-than-repo reductions,” said Vikram Singh, executive director, Urban Money. He explains that public-sector lenders typically move more quickly on pricing because of their funding profiles, while private banks take a more calibrated approach to balance growth and margins. The non-bank lenders continue to be selective given their cost of funds.
Conscious effort to expand home loan portfolios
With outstanding home loan portfolios slowing to 11% in the September quarter from 13% in FY25, the aggressive pricing seen in home loans reflects a conscious trade-off rather than improved balance-sheet conditions. Stable asset quality in the housing segment has also encouraged banks to expand their home loan portfolios. “With stress largely confined to very small‑ticket borrowers, banks view housing finance as a relatively safe way to grow their retail books, attract new customers, and defend market share, even if it meant taking on some near‑term margin pressure,” said a senior official at a state‑run bank.
PSU vs Private Bank
Lenders are focusing on fresh originations to sustain overall growth, and public sector banks (PSU Banks) have taken the lead. Their share of home loan origination value rose to around 50% as of the September quarter, from about 43% in FY25, according to JM Financial data. 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.
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.
To grow their home loan books, banks have also been looking at portfolio acquisitions or balance transfers. “Banks do look at balance transfers, though generally the ticket size tends to be higher and they target customers with high credit scores,” said Sachin Sachdeva, Vice President-Financial Sector Ratings at ICRA, who believes that “in case of smaller ticket loans, banks may target the same to meet their priority sector loan requirements.”
Bankers, though, argue that the sharp cut in home loans should not be read as a sign of falling funding costs. They point out that transmission varies significantly across different maturities. As the Reserve Bank of India (RBI) Deputy Governor Swaminathan J noted in February, about 40% of home loans linked to the external benchmark lending rate (EBLR) adjust immediately to repo changes, while a similar proportion tied to MCLR reflects policy moves only after a lag of nearly two quarters because of six‑month reset cycles.
“MCLR has not softened in line with cumulative repo cuts because banks’ cost of borrowing hasn’t eased meaningfully,” said a senior bank official. Fixed deposit rates remain sticky amid intense competition for deposits and concerns over the durability of liquidity. Even though liquidity appears comfortable at times, lenders are wary of reducing deposit rates without clearer visibility on long‑term funding. As a result, meaningful MCLR transmission is likely only over the next one to two quarters. For now, bankers admit that while home loan rates are being cut to support demand, they are doing so at the cost of margins, especially as the rate‑cut cycle nears its end and policy rates are expected to remain broadly stable, with at most another 25 bps of rate cuts.