In a significant move for borrowers, home loan interest rates in India are poised to plummet to levels not witnessed since before the 2008 global financial crisis. This dramatic shift follows the Reserve Bank of India's Monetary Policy Committee decision to reduce the key repo rate by 25 basis points to 5.25%.
Immediate Impact on Borrowers and Banks
The rate cut is set to directly benefit home loan customers. Several public sector banks, including Union Bank, Bank of India, Bank of Maharashtra, and Indian Overseas Bank, currently offer home loans at 7.35%. Following the RBI's action, the interest rate for these borrowers is expected to decline to around 7.1%.
This new rate of 7.1% matches the deposit rate currently offered by some private sector banks, highlighting the competitive landscape. For a borrower with a substantial Rs 1 crore home loan over a 15-year tenure, this 0.25 percentage-point reduction translates to a monthly EMI saving of approximately Rs 1,440.
The Transmission Challenge and Sectoral Shifts
Banking executives note that for new borrowers to access home loans at 7.1%, lenders will need to aggressively cut deposit rates or adjust the spread over the benchmark rate. An interesting twist emerges here: if banks revise their spreads, new borrowers might paradoxically end up paying more interest than existing customers on floating-rate loans.
While banks may face a squeeze on their net interest margins until deposit rates adjust, non-banking finance companies (NBFCs) are positioned for an immediate benefit due to lower funding costs. Umesh Revankar, Executive Vice-Chairman of Shriram Finance, hailed the policy as a significant enabler for last-mile financiers.
"The continued neutral stance, combined with the Rs 1 lakh crore OMO purchase announcement, ensures that liquidity remains congenial," Revankar stated. He emphasized that this would speed up the transmission of rate cuts to grassroots beneficiaries like small truck operators, rural entrepreneurs, and MSME borrowers.
Credit Growth Driven by Retail and MSMEs
The reduction in lending rates is pushing financial institutions towards greater granularity in their credit portfolios. Banks are increasingly chasing small-business loans, which offer higher yields compared to large corporate loans.
A private bank's credit head pointed out, "Most large corporates are already raising funds from outside the banking system through equity and bonds. If you look at RBI credit numbers, it is the MSME and retail segment that is driving credit growth."
Despite this hunt for higher returns, lenders remain cautious. Recent RBI data on sectoral deployment of bank credit indicates a strategic shift: banks are moving towards secured lending avenues such as gold loans and auto loans, while showing restraint in the unsecured personal loan segment.
The confluence of the rate cut and ample liquidity is set to reshape India's credit landscape, making home ownership more affordable for many while steering the banking sector towards retail and small business financing as the core engines of growth.
