Home loan rates in India are poised to reach levels not seen since before the 2008 global financial crisis. This follows a recent decision by the Reserve Bank of India (RBI) to lower the repo rate by 25 basis points to 5.25%. Currently, several banks, including Union Bank, Bank of India, Bank of Maharashtra, and Indian Overseas Bank, are offering home loans at an interest rate of 7.35%. With the new rate adjustment, borrowers will see their interest rate drop to 7.1%, which matches the deposit rate provided by some private banks.

For a home loan of Rs 1 crore over 15 years, this 0.25 percentage-point reduction translates to a decrease of approximately Rs 1,440 in the monthly EMI. However, bankers caution that for new borrowers to benefit from the 7.1% rate, banks may need to significantly lower deposit rates or adjust the spread over the benchmark rate. This could result in new borrowers paying more interest compared to those with existing floating-rate loans.

While banks may experience a compression in net interest margins until deposit rates decrease, non-banking finance companies (NBFCs) are likely to gain from reduced funding costs. Umesh Revankar, executive vice-chairman of Shriram Finance, noted, "For the NBFC sector, and specifically for last-mile financiers like Shriram Finance, this policy is a significant enabler. The continued neutral stance, combined with the Rs 1 lakh crore OMO purchase announcement, ensures that liquidity remains congenial. This will facilitate the faster transmission of rate cuts to the grassroots level, benefiting the small truck operator, the rural entrepreneur, and the MSME borrower, who are the engines of this 8.2% growth."

Bankers also indicated that the reduction in lending rates may lead them to focus more on small-business loans, which typically offer higher returns. The head of credit at a private bank remarked, "Most large corporates are already raising funds from outside the banking system through equity and bonds. If you look at RBI credit numbers, it is the MSME and retail segment that is driving credit growth."

Despite the shift towards higher-yielding loans, lenders remain cautious about potential defaults. Recent RBI data indicates that banks are increasingly favouring secured loans, such as gold and auto loans, while moving away from unsecured personal loans.