HDFC Reduces Home Loan Rate For Existing Customers

HDFC had earlier reduced its lending rate for new customers on January 3, 2017. 

Signage for HDFC displayed in Mumbai (Photographer: Adeel Halim/Bloomberg) 
Signage for HDFC displayed in Mumbai (Photographer: Adeel Halim/Bloomberg) 

After reducing rates for new customers earlier this month, Housing Development and Finance Corporation Ltd. (HDFC) has decided to bring down rates for existing customers.

The country’s largest mortgage lender has reduced its retail prime lending rate by 15 basis points, it said in a release on Thursday. A reduction in this rate means that lower rates will flow through to existing borrowers automatically without them having to pay a conversion fee to switch to a lower rate.

On January 3, HDFC had reduced rates for new home loans to 8.7 percent for loans of upto 75 lakh. The reduced lending rate for women stood at 8.65 percent.

Loan rates have come down sharply in January due to the surge of deposits that banks have seen following the government’s decision to withdraw notes of Rs 500 and Rs 1,000. While its unclear what proportion of these deposits will remain in the banking system once withdrawal restrictions are lifted, for now, the cost of funds for banks have fallen.

Home Loan Rate Wars

State Bank of India had kicked off the series of rate cuts by bringing down their marginal cost of funds lending rate (MCLR) by 90 basis points. Others like HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. have also followed with rate cuts of between 70-90 basis points. One basis point is one-hundredth of a percentage point.

The MCLR cuts announced by banks, however, benefit only those whose loans are linked to the MCLR and not the previous base rate system as banks have been slow to cut their base rates.

In particular, banks have eagerly cut new home loan rates since that continues to a relatively high growth and low risk segment.

State Bank of India is offering home loans at 8.65 percent and has also introduced schemes which allow borrowers to start with a lower fixed rate. On January 3, SBI said that customers would be able to avail of home loans up to Rs 30 lakh at a fixed rate of 8.55 percent for the first two years of the tenor of the loan, which would later be readjusted to a floating rate.

Bank of Baroda went a step further and announced the lowest available rate in the market. The lender is offering home loans at 8.35 percent.

Given the competition in the home loan market, margins in this segment could reduce, particularly for housing finance companies (HFC), said Religare Institutional Equities in a report on January 10.

“The on-going rate war in the home loan segment will lead to margin compression for HFCs given the higher risk of prepayments and pressure to reprice old loans at a lower rate,” said Religare analyst Parag Jariwala in the report.

Banks are struggling to grow their loan books at a time when demand for credit from industry remains weak. Retail credit growth, which was strong until November, has also taken a hit after demonetisation.

Non-food credit growth has slipped to a multi-decade low of near 5 percent on a year on year basis, according to data from the Reserve Bank of India.