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LIC Housing follows HDFC and reduces rates

Mar 10, 2000

LIC Housing Finance has announced a cut in their interest rates on home loans, ranging from 25 basis points to 175 basis points. It has also decided to merge its three loan slabs into a single slab of Rs 25,000 to Rs 5 m. The following are the rates charged by LIC before and after the rate cut and merging of slabs:

The highest benefit of this rate cut would be for loans for a longer tenure and for a larger amount. For loans between Rs 1 m to Rs 1.5 m interest rate for a 16 year loan was earlier pegged at 14.75%, for loans between Rs 1.5 m to Rs 5 m the interest rate was pegged at 15.25%.

LIC Housing Finance's spreads would be under pressure as on the higher end the rate cut seems substantial. Also the new rates of interest will apply to all new loans and loans which are approved and not yet disbursed.

This loan reduction is the result of the abolition of interest tax in the budget and intense competition. As HUDCO and HDFC have recently reduced their rates, LIC Housing has followed suit to bring their rates in line with the market. The interest tax of 2% was earlier included in the rate charged for housing loans. LIC Housing Finance plans to pass on the reduction of interest tax to its customers. However it is not clear whether this interest tax cut would be applicable only to new loans or also to existing loans.

With these rate cuts other players in the housing finance segment will also have to reduce their rates. However some banks and finance companies claim to be charging lower rates from before and hence do not feel the need to reduce their rates.

Market View:
LIC Housing Finance has not been rated favourably by analysts due to its poor asset quality and its low market share. Also as it has been promoted by a public sector company, it suffers from the inefficiencies of public sector undertakings. HDFC's customer base is higher due to its efficient and prompt services as compared to LIC Housing Finance.

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