The government has said that it was in favour of lower interest rates for home loans under Rs 20 lakh. Classified under priority sector, these loans constitute 80% of all home loans. Finance minister P Chidambaram said that it is for the Reserve Bank of India (RBI) and the banks to take a call on rates, while making it clear that he was in favour of softer rates for small home loans.

“I shall certainly bear in mind that there is public demand that interest rates for those who borrow up to Rs 20 lakh must be lowered,” Mr Chidambaram said during a post-Budget interaction at industry chamber Assocham. He agreed to the view that home loan borrowers of less than Rs 20 lakh should be incentivised by lowering interest rates.

“I made a number of efforts to impress upon bankers in this regard. It is a constant effort that I will have to make. But bankers and RBI will have to take a call.” Already, these loans have less risk weight than those above Rs 20 lakh and, therefore, bankers have incentives to lend to these borrowers at lower rates.

Banks including SBI, Canara Bank, Allahabad Bank and HDFC have reduced lending rates by 25-50 bps. HDFC brought it down by 25 bps to 13.75%. The largest private bank, ICICI Bank, has said that there could be softening of rates in the first quarter of the next fiscal. SBI charges 10-11.5% for loans up to Rs 20 lakh.

However, Mr Chidambaram’s statement could mean a further softening of interest rates in the home loan segment which grew by 15% in the current fiscal year. The minister left it to the RBI to balance growth with inflation.

Following the Reserve Bank’s tight monetary policy initiatives, interest rates on housing loans have shot up to 10-12%, pulling down demand.

Regulators (the RBI and the finance ministry) are irked by the fact that many banks apply a flat interest rate for all loans despite the different risk weightages.