Two months after lower interest rates were announced for home loans up to Rs 20 lakh, public sector banks (PSBs) have cleared only 28,000 proposals and disbursed Rs 1,550 crore under this special scheme.

For instance, India’s second-largest public sector bank Punjab National Bank (PNB) has approved only 35 loan proposals and disbursed Rs 1.70 crore under the scheme, according to data compiled by industry bodies and the government. At the other end of the spectrum is State Bank of India (SBI), the country’s largest lender, which has cleared around 6,500 applications (see table).

Under the special loan package, pushed by the government to boost real estate demand, public sector banks decided to freeze interest rates on home loans up to Rs 5 lakh at 8.5 per cent for five years. For loans between Rs 5 lakh and Rs 20 lakh, the rate was frozen at 9.25 per cent. SBI went ahead and dropped the rate further to 8 per cent for a year and others such as Central Bank of India have also responded in the same manner.

Further, borrowers can avail themselves of a loan of up to Rs 5 lakh by paying 10 per cent upfront and in case of home loans of Rs 5-20 lakh, the upfront payment has been fixed at 15 per cent compared to 25-30 per cent for other loans.

But with buyers expecting real estate prices to fall further, many are deferring a purchase for the moment, said bankers.
 

“Real estate firms are grappling with a sharp drop in demand and mounting debt repayment. They will have to reduce prices substantially to clear inventory. Once that happens, we may see some improvement in response,” said a senior public sector bank executive.

Though prices have dropped by around 30 per cent in certain pockets, buyers are more worried about the equated monthly installments (EMIs), which would come down if real estate prices dropped more, bankers said. “Interest rate is a smaller worry,” said a bank executive.
 

“With the economic slowdown, many buyers are preferring to stick to rented accommodation instead of purchasing their own apartment,” another executive said.

Besides, many banks are not pushing home loans under this scheme as they are worried over their cost of funds. With funds raised at higher costs, public sector banks would see pressure on their spreads if they hawked the special scheme too aggressively, said an analyst at a Mumbai-based brokerage.

Apart from the cost of funds, banks also have to bear the cost of providing life insurance cover to the borrowers. Also, they are not allowed to charge any processing fee, which adds to the overall cost.

Bankers also said that even for normal home loans, demand has slowed down in anticipation of further reduction in real estate prices. According to the Reserve Bank of India data, the growth in housing loans dropped to 8.8 per cent for the year up to December 19, 2008, as against a year-on-year rise of 14.8 per cent in the period up to December 21, 2007. Banks sanctioned home loans of Rs 21,989 crore in the year up to December 19, 2008, as against Rs 31,780 crore in 12 months ended December 17, 2007.

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