State-owned banks trim interest rates on fresh bout of liquidity, but private banks unrelenting to follow suit

Raghu Nair recently pre-paid his home loan with a leading private bank and switched over to a public sector bank (PSB) which charged him a much lower interest rate. The 32 year-old businessman is making a neat saving of approximately Rs 3,000 on his EMI’s every month with the switchover.

To simplify the math, if you had taken a home loan of Rs 20 lakhs on a 20 year term, at an interest rate of 13% two years back, and in case a PSB offers you a fresh loan at 11%, you can make a saving of around Rs 2,600 per month due to the lower interest accruals on the outstanding amount of around Rs 19.47 lakhs.

Public sector banks (PSBs) say that in the last two months, they are increasingly seeing a trend of individuals making similar switches as private banks are unwilling to cut home loan rates. “This trend has been around for about two months now and we see it gaining traction. An interest rate differential of even 2% can make a huge difference especially if the tenure of the loan is longer,” said CMD of Vijaya Bank, Albert Tauro.

Owing to the increased liquidity infused by the RBI in the last few months, PSBs have steadily reduced their interest rates on loans. For instance, some PSBs like Union Bank and Punjab National Bank have reduced their home loans between 125-150 basis points recently. SBI, in fact, is offering home loans at 8%. However, some of the private banks are still charging rates between 12-13% and have not capped it despite PSBs aggressively tapping into this segment.

Bankers, however, warn that though interest rate differentials between home loans from private banks and PSBs do exist currently and there are several factors that one must keep in mind before making the switchover. Banks charge anywhere between 2-3% as pre payment penalties on the outstanding loan. HDFC Bank, for instance, recently hiked its pre-payment charges to 3%. Banks also charge anywhere between 0.4- 1% of the loan amount as processing charges for a fresh loan.

“The loan taker must ensure that the pre-payment and processing charges do not negate the benefit a loan taker gets due to interest rate differentials. The longer the tenure of the loan, the greater the chance of benefiting from this switchover,” said Union Bank of India general manager C Abraham. If the remaining tenure of the loan is five years or less, even a 3% differential might not help too much. By this time, you would have already paid most of the interest amount to the bank,

he added.  Another factor is that the value of your property might be much lesser than say a year back. Hence, while availing a new loan against the property, the amount granted maybe insufficient to fully pre-pay the original loan. This may force you to shell out more money. Vijaya Bank’s Tauro also cautions loan takers to check with existing banks whether they are willing to offer lower interest rates.

Pranav Nambiar / DNA-Daily News & Analysis Source: 3D Syndication