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Housing loans become costlier in India

With hike of interest rates by State Bank of India, the largest Indian Bank, housing loans are going to become costlier across the Indian banking sector.

State Bank of India has hiked interest rates on its home loans by 0.25 to 0.75 percentage points, across all tenors in the floating and fixed interest rate category effective from March 1, 2006.

The Reserve Bank of India had increased reverse repo and repo rates by 0.25 percentage points in its mid-term review of the monetary policy in January 2006, signalling a hardening of interest rates.

Following this, most banks raised their deposit rates. The rising deposit rates and continuing credit growth have put pressure on the net interest margins of all banks. Home loans are among the most finely priced lending products and banks are unable to maintain the interest rates. Home loans earlier increased by 50 per cent in 2004-05.

Other leading players in the home loans segment such as HDFC, LIC Housing Finance and ICICI Bank had already raised interest rates by 0.5 percentage points in early February 2006.

IDBI Ltd raised retail lending rates by 0.25 percentage points. ICICI Bank also raised its prime lending rate by 0.5 percentage points to 11.75 per cent.

Real estate prices have risen substantially over the last few years and this has resulted in high demand for home loans. The rise in disposable income of salaried class is also fuelling the demand.

The tax benefits available on home loan interest and repayment is also a major factor in driving demand. As per the current regulations, individuals can claim up to Rs 1 lakh per annum as deduction for home loan principal repayment and additional deduction of Rs1.5 lakh towards interest payments.

Therefore the marginal increase in home loan rates may not significantly impact home loan business growth.

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