Banks Adjust Home Loan Rates to Protect Margins

In a strategic move to protect their margins amidst falling policy rates, banks like SBI and Union Bank of India have widened the spreads on their home loans over the reference rate. This adjustment comes as the repo rate has seen a reduction of 100 basis points this year, with potential for further cuts.

Impact on Borrowers and Banks

Unlike previous scenarios where lower rates primarily benefited new borrowers, the current situation has reversed. New borrowers are facing higher costs, while existing customers enjoy the benefits of rate cuts, thanks to RBI regulations. This shift is largely due to the banks' sticky funding costs, especially for state-owned lenders with a significant base of small savers reliant on fixed deposits.

A Shift in Strategy

The recent adjustments mark a strategic pivot for state-owned banks, which had previously undercut private rivals to capture market share. However, with lending rates declining and deposit costs remaining high, home loans have begun to erode returns, prompting a reassessment of growth versus profitability priorities.

Looking Ahead

As policy rates are expected to drop further, banks are focusing on protecting margins over aggressive growth. This could herald a new era in the home loan market, where sustainable returns take precedence over cheap credit.