Cheap Home Loans Good News For New Borrowers But Not For Savers

Two major reasons have prompted banks to generously cut home loan lending rates. One, a deposit overflow following demonetisation, two, Prime Minister Narendra Modi’s ‘appeal’ to banks to push credit to low-income segments and cut rates, which is also a move to placate public sentiment post the note ban.

State Bank of India’s (SBI) effective home loan rates will now be at 8.6 per cent compared with 9.1 per cent earlier. This is adding the 60 basis points spread above the new MCLR (marginal cost of lending rates) of 8 per cent. Other banks like Punjab National Bank, Union Bank of India too, have brought down their benchmark lending rates by up to 0.9 per cent.

While this is good news for new borrowers, who will see their loan tenure come down by a few years, if they opt for 20-25 year loan, existing borrowers can benefit only if the customers pay a fee and shift their loans to the MCLR-based loan structure.

Slashing home loan rates may result in a sudden rise in low-cost deposits, but may become a burden if they are not employed profitably, which will then result in a carry cost to the lenders. If banks fail to generate credit growth, then the collateral damage will have to be faced by savers in the form of more deposit rate cuts. The one-year deposit rates have fallen from around 9 per cent to 6.9 per cent for most banks.

Also, there will be no big rush for home loans just because the interest rate has come down. Lower rates on their own cannot spur loan demand as factors such as demonetisation-led job losses and the slowdown have cast a shadow on the economy.

In such an event, deposit rate cuts will deliver a double whammy to the saver since returns on other national savings schemes too is spiralling down.