In the interest of BUYERS

SBI has frozen interest rates at 8% for new home loan customers and other PSU banks are expected to follow suit. Will this prompt buyers to move away from private banks or is the scenario linked to the low sentiments? Neha Dewan finds out

    TH I RT Y- Y E A R - O L D Sanchit Kapoor had recently applied for a home loan to HDFC Bank. But meanwhile, State Bank of India (SBI) has frozen interest rates at 8% for a year for new home loan customers. So now, with this latest development, Kapoor is wondering whether moving to a PSU bank makes more sense since he will end up saving a lot more every month.
    And Kapoor is not the only one reconsidering his decision. In fact, many people who had borrowed from private banks are thinking of shifting to PSU banks because of the lower interest rates they offer. Private banks such as ICICI Bank and HDFC Bank offer rates in the range of 11-13%. On the other hand, after a series of rate cuts from the PSU banks, they are currently offering a far more attractive regime for the cash-pressed consumer.
    Says Rajiv Sahni, partner (real estate practice) at Ernst & Young, "Following RBI's cut of major rates such as repo, most banks were pressed by the government to pass on benefits to customers. SBI's recent rate freeze at 8% for new home loan customers is one such example. Other public sector banks are expected to follow suit. While this may see a marginal shift of customers to PSU banks in the immediate future, private banks are likely to follow suit if they see a positive trend in customers' reaction to such rate cuts."
    Experts, however, do feel that while fresh loans are far more likely to be approved without hitches, the rate cuts may not be as exciting for existing borrowers. Switching a loan from one bank to another is not without complications, and subject to approval of the original bank, and not many existing borrowers with private sector banks may be keen to shift. In fact, a customer may have to cough up 2% of the loan amount as prepayment charges which can act as a big deterrent for existing borrowers to shift.
    Developers, however, are of the view that the current move by PSU banks will surely draw attention of all the home loan borrowers in these difficult times. "This step by SBI is bound to lead people from private banks to shift to PSUs. It will help save around 3-4% of the interest cost, which will be huge," feels Sunil Bedi, chairman and director of JMD Group. Agrees R K Mittal, CMD of CHD Developers, who feels that consumers will definitely want to move to PSU banks due to lower interest rates. "This move will not only help in spurring demand in the real estate sector but will also force the private sector banks to lower rates. Consumers have been waiting for this level of interest rates for past several months. The overall scenario is now favourable for the real estate industry and we expect demand to start picking up pace, helping all real estate developers to sell a lot more in the forthcoming few months than they did during the past two quarters."
However, a drop in interest rates is not making developers cut prices again to push up the demand. The tight liquidity phase that developers are undergoing might not prompt them to slash prices even though interest rates have been lowered. SVP Builders, for instance, maintains that prices are already reasonable enough and they will not be cutting them any further. Raheja Developers, too, feels that developers have already reduced the prices to an extent where they can sustain themselves, hence there will not be a further revision in prices. CHD Developers speaks of their innovative schemes introduced earlier to attract buyers.
    Anuj Puri, chairman & country head of global real estate consultancy Jones Lang LaSalle Meghraj (JLLM), feels that real estate prices will need to rationalise as well, and buyers will have to break out of their watchand-wait mindset. "It will take more than a drop in interest rates to revive demand to a satisfactory level. Buyers will need to come out of their waiting mode. Most of the buyers seem to be trying to time the market for the lowest entry point, which is not advisable, since the real estate market cannot be accurately predicted about. The point of optimum entry may pass and the best opportunities may be lost."
    Overall, this is a time to weigh the pros and cons of a property purchase before taking the plunge. And even though the real estate sector may not be seeing its best phase right now, several initiatives are being taken up to perk up residential demand. A top industry consultant who SundayET spoke to even predicts that home loan rates could fall further to as low as low as 7%. If that happens then better deals could, perhaps, be just round the corner.
    Mr Sahni of E&Y sums it up, saying that the sector is driven largely by overall economic sentiment and only to some extent by the cost of borrowings. "A revival in the sector will only be witnessed with an improvement in the overall sentiment. Though the government has been proactively working towards this, the global liquidity crisis has had a very severe impact on inbound investments. It will take some time before we may see a revival of the sector and more buyers' interest," he adds.
GOING PUBLIC

• People who had borrowed from pvt banks are thinking of shifting to PSU banks due to the lower interest rates

• Experts say that while fresh loans are more likely to be approved, the rate cuts may not be as exciting for existing borrowers

• A drop in the interest rates is not making developers cut prices again to push up demand

• Anuj Puri, chairman & country head of JLLM, feels that real estate prices will need to rationalise and buyers will have to break out of the watch-and-wait mindset