SBI, HDFC rate war is tokenism; customers unlikely to benefit hugely

India’s top home loan lenders are engaged in a rate war and it is a joke of a rate war. State Bank of India, the country’s largest lender, yesterday announced a cut in home loan interest rate by up to 0.25% for new borrowers. The aim was to match its competitor HDFC Ltd. The move follows a rate cutting spree many banks, including SBI, ICICI Bank, HDFC Bank and Axis Bank, were engaged in last week after Governor Raghuram Rajan kept the RBI’s policy rate unchaged at 7.5 percent citing weak monetary policy transmisssion. [caption id=“attachment_2182945” align=“alignleft” width=“380”]  Reuters[/caption] Monetary policy transmission happens when the actions by the central bank reaches the end consumer through banks. When Rajan said this is weak, what he meant was that banks were not cutting rates despite the RBI cutting its policy rates twice this year and signalling a reversal in its stance. So now SBI has acted again by cutting the home loan rate further to match it with HDFC. Yes, clearly this is a rate war. But it will be foolish to think that customers are going to benefit. Here are four reasons why it is so. 1) It is all tokenism: One only needs to look at the details in the SBI press release to understand why this is a tokenism. SBI has said rate for women borrowers has been aligned to the base rate at 9.85% per annum. For other borrowers, the interest rate will be 9.90%, 5 basis points higher than the base rate. Base rate is the rate below which banks are not allowed to lend. The rates will be applicable for all new home loans sanctioned on or after April 13, SBI said. Interest Rate for SBI existing floating rate home loan borrowers has also been reduced to the extent of reduction in the bank’s base rate to 9.85% effective April 10. The bottom line of the complex details is that not all borrowers will get the benefit. This is because the bank has not cut its base rate. For all customers to benefit equally, banks should cut their base rate. A selective cut in interest rate is mere tokenism. It serves only very few borrowers. 2) Premium on base rate: Now, even if banks cut base rate, retail customers are unlikely to get the benefit. This is because most of most banks do not lend to retail customers at the base rate - they charge a premium. In other words, SBI’s base rate may be 9.85 percent, but a retail customer cannot expect to get that rate. As the bank itself has said in the press release, all borrowers apart from women will be charged 9.90 percent. 3) High real estate prices: When it comes to home loans, it is not the interest rates that is deterring the buyers but it is the high real estate prices. House prices in the country have shot through the roof over the last few years which have resulted in a slump in sales and increase in unsold inventory. A recent survey by IIM-B and Magicbricks found that nearly 50% of theh respondents are waiting for prices to drop, while only 11% are waiting for interest rates to come down. “This posts a question mark on the role which decrease in home loan rates can play in improving the fortunes of the reality sector,” the survey said. 4) Not actually a rate war: Apart the large lenders, small and medium-sized banks have limited ability to cut rates since their interest earnings are already under pressure. So this is unlikely to result in significant relief for customers. On the whole, if the common man has to benefit, the RBI will have to cut its policy rate further. That will happen only if the inflation sticks to its glide path and otehr risk factors, cited by the central bank, subside.