Bank stocks fall sharply on rate cuts

02 February 2009

Last week the State Bank of India rolled out a special home loan offer for new customers to avail home loans at 8 per cent interest rate for one year effective 2 February. The scheme closes on 30 of April this year. (See: SBI freezes home loan rates at 8 per cent for one year) 

Existing borrowers can also borrow upto 10 per cent of their exposure upto a maximum of Rs5 lakh at the 8 per cent under a new product, the 'SBI Lifestyle Loan', a multipurpose loan.

SBI 's home loan portfolio is around  Rs52,000 crore with the average ticket size of its home loans around Rs17 lakh. The current floating interest rate on its home loans up to Rs30 lakh  are 9.75 per cent (five years), 10 per cent (above five years and up to 15 years), and 10.25 per cent (above 15 years and up to 25 years). 

According to a senior bank official there is a genuine demand for home loans and SBI's move would encourage borrowers to go for loans which would stimulate demand. He added that it would also spur the real estate and allied sectors including steel, cement and other construction materials.

Though SBI feels that lowering the rates would stimulate demand for properties analysts point out that interest rate cut alone cannot boost the realty market. They say that lowering the serviceability index alone would not spur demand rather it is the property prices that have to go down.

Some analysts point to the possibility of loan profitiability of SBI being impacted by the decision. They say the move shows growth in business is virtally nil and banks are now coming under increasing pressure.