Growth in the home loan market may see a drop of 10 percentage points or more from the current 30 per cent following the recent increase in interest rates.

Leading bankers expect the number of transactions to fall 30 to 35 per cent as buyers wait for a price correction in real estate.

The view is that the first category of borrowers to shy away would be speculators.

Buyers who are investing in second homes as an asset class will probably wait and watch. Those who need to buy a house for personal use would probably have no choice but borrow. It is this last category of potential buyers on which all banks plan to focus for future business.

"Eventually the demand exists. Housing penetration is still poor in the country and with increased economic activity and job creation, the demand for housing will persist," said Rajiv Sabharwal, senior general manager, ICICI Bank.

While market leader ICICI is not planning to reduce its credit exposure to home loans, other growing businesses might start making a larger contribution to the credit portfolio.

HDFC, the second-largest home loan mortgager, conceded that there might be a slowdown, but does not think the problem is serious.

"The rapid increase in interest rates and the imminent correction in property prices, more so commercial property prices, will force investors out of the market. Although this will slow demand from speculators, it will certainly not deter actual home buyers from buying a property," said a spokesperson.

Harpreet Singh, business director, Centurion Bank of Punjab, has a contradictory view. "Will you buy a house when you know that interest rates are too high and that property prices will fall further in a few months? Transactions are going to be hit very badly," he said.

Punjab National Bank, India's second-largest public sector bank, expects its home loan business to grow, but only if there is a significant correction in the property market.

"Interest rates that were at 16-17 per cent a decade ago are currently at 11 to 11.50 per cent," the HDFC official pointed out. He added that tax benefits on home loans make the effective interest rate lower.

A home loan qualifies for tax benefits of Rs 1 lakh on the principal amount repaid and up to Rs. 1.5 lakh a year on the interest paid.

"After factoring in the tax benefits, the effective interest rate on home loan works out to around 6.5 per cent on an interest rate charged at 11.25 per cent, assuming all the tax benefits have been availed of," he said.

Punjab National Bank, India's second-largest public sector bank, expects its home loan business to grow, but only if there is a significant correction in the property market. It had registered a 27 per cent decline in home loan disbursements and a 25 per cent reduction in applications for home loans in 2006-07.

"If property prices head south, we can expect a 10 per cent increase in applications for home loans," said US Bhargava, general manager, Punjab National Bank.

The bank is reducing its 25 per cent credit exposure on personal loans (with home loans having the majority share) to 22 per cent.