Govt may restrict home loan rates to 7-8%

The government is pushing state-owned banks to offer interest rates on housing loans up to Rs 20 lakh (Rs 2 million) at pre-2004 levels.

This would mean consumers could get home loans at 7 to 8 per cent, 2 or 3 percentage points lower than the current market rate of 9.5 to 10.5 per cent.

Public sector bankers indicated that they have received signals to lower pricing of home loans up to Rs 20 lakh. "The price of such home loans may be capped at 10 per cent," said a public sector bank chief.

Finance secretary Arun Ramanathan is likely to meet some public sector bank chiefs for an action plan. The contours of the package are likely to be ready early next week. The government on Sunday had said state-owned banks would announce a package for home loans up to Rs 20 lakh.

Apart from taking a direct hit in the form of an interest subsidy, the government is looking at bridging the cost of this scheme - the difference between the rate at which the loan is offered and the market rate - through refinancing from the Reserve Bank of India.

The government may also bear the interest risk - the movement in the market rate against a fixed rate the lenders will charge borrowers of such loans.

"We are looking at various options like interest subvention and cheaper liquidity support to banks to provide home loans at the pre-2004 rate of interest," said a finance ministry official familiar with the development.

Home loans up to Rs 500,000 may attract interest of around 7 per cent and those above Rs 500,000 and up to Rs 20 lakh around 8 per cent, sources said. With interest subvention, the actual interest realisation for banks may be around 10 per cent.

The officials said the cost of funds has started to fall and will see a further decline after the RBI on Saturday lowered the repo rate, the rate at which it lends to banks, to 6.5 per cent and the reverse repo rate, the rate at which banks lend to RBI, to 5 per cent.

State-owned banks have reduced interest rates from as high as 11 to 12 per cent to 9.5 to 10 per cent. Deposit rates may fall further after RBI's recent rate cuts. The average cost of funds for banks is 6 per cent now.