In a welcome development for home loan borrowers, public sector bank BoB (Bank of Baroda) and HDFC Limited have both slashed their rates of interest on home loans.
Although both these banks have lowered home loan interest rates marginally, other banks in the country may not follow the same trend till April, 2020, as per industry experts. For lowering interest rates as far as new customers are concerned, BoB (Bank of Baroda) has reduced its mark-up charged on the external benchmark.
Major aspects worth knowing about in this regard
Bank of Baroda (BoB) was previously charging a spread of 300 basis points for its home loans over and above the repo rate. The repo rate currently stands at 5.15%. The lowest rate of interest on home loans was thus at 8.15%. Bank of Baroda has now lowered this spread by 15 basis points and it stands at 285 basis points currently. This means that new interest rates on home loans start from around 8% with effect from 1st March, 2020.
Bank of Baroda was able to take this decision to reduce the repo rate mark-up since its cost of funds was lowered in recent times. Senior officials have confirmed that on the basis of the information for December, 2019, cost of funds was reviewed extensively at the bank and thereafter, since it was lower than before, the decision was taken to pass on the subsequent benefits to customers. This review of cost of funds is undertaken on a quarterly basis as per the bank’s officials.
HDFC Limited lowered its RPLR (retail prime lending rate) on the 5th of March, 2020, by 5 basis points. The RPLR is presently at 16.6% as per the official website. HDFC has confirmed that the changed rates will come into effect from 9th March, 2020 and will benefit all existing home loan borrowers. The lowest home loan interest rate for customers has thus come down to 8% at HDFC Bank as per reports.
What else should you know?
HDFC is one of the biggest home loan players in the industry while BoB (Bank of Baroda) has been swiftly scaling up its home loan portfolio over the last few years. In spite of both these banks cutting their rates of interest, other private and public sector lenders may refrain from rate cuts immediately as per industry experts. Most banks, according to them, have already priced loans at really competitive rates. Even SBI (State Bank of India), the largest retail home loan provider in the country, offers the lowest interest rate of 7.95% at the moment. Interest rates on home loans across other public sector banks are already close to this figure according to experts.
Bank of India (8%), Central Bank of India (8%), Canara Bank (8.05%) and Punjab National Bank (7.95%) are already offering competitive rates of interest for customers. HDFC’s current rates are the most competitive amongst HFCs (housing finance companies). With the interest rates already touching aggressive levels, several lenders are offering processing fee discounts to attract more borrowers. There are no other major interest rate revisions in store for the industry at least till April, 2020. RBI (Reserve Bank of India) held its 6th bi-monthly meeting for FY2019-20 on the 6th of February, 2020. The RBI did not slash the repo rate and instead came up with LTRO (long-term repo operations), under which the country’s banks will get cheaper funds for the long term.
The RBI has also relaxed the CRR (cash reserve ratio) norms for auto and home loans along with loans extended to MSMEs (micro, small and medium enterprises). These combined decisions should go a long way towards lowering cost of funds for banking sector players and the benefits should be passed on to old and new borrowers alike. While this is a major reason behind the recent spate of interest rate cuts, this has also spawned more competition in the market. BoB is matching the lowest rate almost to SBI which has the lowest industry rate the moment. However, BoB is still not a major player in this category like SBI and hence the latter will not be under too much pressure post its recent cut in interest rates. The scenario is slightly different for HDFC Limited since it is an HFC (housing finance company) and is not directly impacted by the monetary policy decisions taken by the Reserve Bank of India (RBI). SBI has already set the trend for the lowest interest rates in the market and hence it is competition that has made biggies like HDFC and BoB follow suit.