Home loan borrowers shift to PSU banks on lower rates

Home loan borrowers are increasingly shifting loans from private sector mortgage lenders to public sector banks (PSBs) to take advantage of the wide difference between the interest rates for existing borrowers of private lenders and new borrowers of PSBs,said executives of two public sector banks.

Take the case of Rajat Sharma (name changed), a private bank customer. He took a Rs 35 lakh home loan two years ago and now owes a principal amount of Rs 30 lakh, after paying EMIs and making part pre-payments. Mr Sharma is now shifting his loan to the State Bank of India (SBI), the country’s largest bank.

At the current rate of 12.75%, he is paying an EMI of Rs 36,049 to the private bank, but SBI will charge him only Rs 26,948 as EMI at a rate of 8%.

Assuming the rates offered by the two banks do not change for a year, the customer pays Rs 1.09 lakh less as EMIs in a year. After accounting for transfer charges and processing fee, which is around Rs 75,000, the customer still saves Rs 34,000 in one year.

A customer has to usually pay 2% of the outstanding principal as pre-payment charges to his existing lender and around 0.5% as processing fee to the new lender.

"Low interest rates in public sector banks are stimulating demand and luring both new and existing customers. We have seen a surge in the number of queries from existing customers of private sector banks wanting to shift their loan portfolio to us,” said Corporation Bank chairman JM Garg, adding the trend has emerged in the past one month. Corporation Bank offers home loans at 8.5-10.5%.

HDFC, the country’s largest mortgage lender, denied there was any significant increase in loan transfer requests.

"At this stage, we have not seen any increased requests for loan transfers from our existing customers," an HDFC spokesperson said. ICICI Bank, the second-largest mortgage lender, declined to comment.

Private banks have been loath to lowering mortgage rates, despite a series of key policy rate cuts by the Reserve Bank of India. State-owned banks, such as SBI and Punjab National Bank (PNB), have significantly cut rates, bringing down home loan cost.

Source: Economic Times February’09

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