Mumbai: Existing home loan borrowers are unlikely to get any respite from their high interest burden even as banks continue to dole out attractive rates on new mortgages. A uniform rate to all borrowers is difficult to achieve as it could seriously impact banks’ profitability, according to bankers.
The Economic Times reported on Friday that the Indian Banks’ Association (IBA), the apex bankers’ lobby, has asked banks to offer a uniform interest rate to both old and new home loan customers.
According to a senior IBA official, the association is in no position to dictate interest rates to banks and it is up to the banks to decide on the issue. “IBA is a platform for banks to discuss various issues. Since there were a flood of complaints by home loan borrowers, this issue was discussed by the management committee of the association. IBA can’t dictate interest rates to banks,” said the official, who did not want to be named.
According to the official, bankers have apprehensions about the differing cost of funds. The (current) festive scheme offers are also for a very short period and cannot be run throughout the year, the official said.
“The matter is being debated and is open-ended. Banks are no way close to a consensus as the issue has implications on profitability,” said the official.
To support the growth of the economy, public sector banks are offering home loan rates that are fixed for a year or two and then move to the floating category. The rate of interest offered ranges between 8% and 8.50%, whereas existing customers are paying 8.5-10% floating rates on their loans. This has led to existing customers complaining to the Reserve Bank of India.
Bankers say a uniform rate is not possible as the rate of interest at which they disburse the loan depends upon the cost of funds prevailing at that time. However, none of the bankers wanted to be identified because of the sensitivity of the issue and as the discussions are still at a preliminary stage. “If we equate the old borrower with the new one, we are a loser,” said an executive director of a large public sector bank.
At least 90% of the housing loans disbursed by banks are based on floating rates, which are lower than the main lending rate, also known as prime lending rate, of the bank by a few percentage points. This difference, or spread, remains fixed. So when the main lending rate goes up or down, the rate of interest on the housing loan also changes.
Banks typically don’t change prime lending rates often, but the cost of funds differs frequently, depending upon market conditions. Hence, banks adjust these spreads to recover costs. When the cost of funds is high, the spread is higher and when the cost is lower, the bank lowers the spread.
A uniform rate of interest would mean that the spreads should also be uniform between existing and new borrowers. But bankers say that given the volatility in cost of funds, it is not possible.
“A lower home loan rate is possible now because the interest rate scenario is soft,” the bank executive director said. “Once the interest rates start going up, we may have to widen the spread again because cost of funds will again start going up.”
According to another executive director of a public sector bank, a uniform rate of interest in any sector would also force banks to extend the same to other sectors as well where the loans are floating in nature—for example, loans to small and medium enterprises.
“It is not possible for us. If we introduce a uniform rate, we are staring at a huge loss in different portfolios,” said the banker.
However, bankers also conceded that a uniform rate could be necessary to retain the customer as a home loan borrower has the freedom to switch banks. Although the concessional rates extended by banks are for fresh buyers, banks can extend these offers to customers they are taking over from other banks.
“We might decide on changing the spread internally for some customers, but a uniform rate is not an easy proposition,” said another senior banker with a public sector bank.