Several leading Indian banks have announced reductions in their Marginal Cost of Funds-based Lending Rates (MCLR) and fixed deposit rates, reflecting a broader trend of rate cuts in domestic and international markets.

MCLR Rate Cuts

• HDFC Bank: Lowered select tenure rates by 5 basis points (bps), with six-month and one-year MCLR now at 8.65%
• Punjab National Bank (PNB): Cut MCLR by 5-15 bps across most tenures, bringing the one-year MCLR to 8.80%
• Bank of Baroda: Reduced overnight MCLR by 10 bps to 7.85% and three-month MCLR by 15 bps to 8.20%
• Bank of India: Decreased rates by 5-15 bps across most tenures except overnight, with the three-year MCLR now at 9.00%
• Indian Overseas Bank: Cut overnight, one-year, two-year, and three-year MCLR by 5 bps
• Central Bank of India: Also announced MCLR reductions, though specific details were not provided

Fixed Deposit Rate Trends

Fixed deposit rates are declining across Indian banks as domestic and international rate cuts gain momentum.

• Most standard banks currently offer FD rates ranging from 6.45% to 6.70% annually for regular depositors, with seniors receiving an additional 50 basis points.
• Small finance banks continue offering the highest rates, often reaching 8.00% or higher.
• Among private banks, rates vary from HDFC Bank's 6.60% to SBM Bank India's 7.50%.
• Public sector banks like SBI offer 6.45% while Central Bank of India provides up to 6.75%.
• Small finance banks lead with Suryoday offering 8.20% and Jana providing 8.00%.

Impact on Borrowers and Depositors

1. Lower EMIs: Borrowers with floating rate loans linked to MCLR may see a decrease in their Equated Monthly Installments (EMIs)
2. Shorter Loan Tenures: Alternatively, borrowers might benefit from reduced overall loan tenures if they maintain their current EMI amounts
3. Declining FD Returns: Depositors may face lower returns on their fixed deposits as banks continue to cut rates

Market Outlook

The RBI maintained the repo rate at 5.50% but has already reduced rates by 100 basis points. Experts predict FD rates may approach 6.00% if further rate cuts occur, and recommend depositors lock in current rates before they decline further.

Conclusion

The widespread rate cuts by major Indian banks signal a changing landscape for both borrowers and depositors. While borrowers may benefit from lower EMIs or shorter loan tenures, depositors face the challenge of declining returns on their fixed deposits. As the banking sector continues to evolve, these rate adjustments reflect the ongoing efforts of financial institutions to balance competitive practices with changing economic conditions.

In a strategic shift, banks are increasingly focusing on affluent customers by offering specialized loan products for luxury homes. This move comes as the premium housing segment experiences robust growth, contrasting with the overall slowdown in the mortgage market.

Luxury Housing Market Surge

The luxury housing market has shown remarkable growth, with high-end properties comprising a larger share of total sales. Luxury homes, defined as properties priced above ₹2 crore in Mumbai and Delhi and ₹1.5 crore in other metropolitan areas, now account for 34% of sales in the first quarter, up from 30% in the previous period.

The segment has witnessed an impressive 85% year-on-year growth, with nearly 7,000 high-end units sold across the top seven cities in India. This surge in luxury home sales has caught the attention of banks, who are now tailoring their offerings to cater to this lucrative market.

Competitive Loan Rates for Premium Borrowers

To attract high-net-worth individuals, banks are offering competitive interest rates ranging from 7.50% to 7.90% for top-tier borrowers. These attractive rates, combined with the growing demand for luxury properties, are helping banks offset the deceleration in the overall home loan market.

Overall Mortgage Market Slowdown

While the luxury segment thrives, the broader home loan market has experienced a slowdown. The growth rate of the home loan market has decelerated to 9.60% year-on-year, reaching ₹30.81 lakh crore in June, down from the earlier growth rate of 13%.

Strategic Advantages for Banks

Banks view affluent borrowers as more than just mortgage clients. These customers present opportunities for cross-selling a range of financial products and services over the typical 10-20 year loan tenure, including:

• Wealth management products
• Insurance policies
• Other financial services

This approach allows banks to maximize the lifetime value of their high-net-worth customers.

Future Projections for the Housing Market

The premium housing segment is expected to continue its strong performance, with projections indicating that luxury homes will account for 38-40% of new launches. In contrast, the affordable and mid-segment housing markets are anticipated to shrink:

• Affordable housing segment: Expected to decrease to 10-12% of new launches
• Mid-segment housing: Projected to reduce to 19-20% of new launches

These shifts are primarily attributed to rising land and material costs, making it increasingly challenging for developers to offer properties in the lower price brackets.

Implications for the Real Estate Sector

The focus on luxury housing and the shrinking affordable housing segment could have significant implications for the real estate sector:

1. Increased competition among developers in the luxury segment
2. Potential pricing pressures in the affordable housing market
3. Shift in urban development patterns, with more emphasis on high-end residential areas

As banks continue to adapt their strategies to market trends, the luxury home loan segment is likely to remain a key focus area, potentially reshaping the landscape of both the banking and real estate sectors in India.