Banks are saying no to fixed rate home loans beyond five years as many fear an asset-liability mismatch if interest rates significantly change.

Banks, unlike housing finance companies, do not have access to long-term funds. Most rely solely on savings and current accounts as well as time deposits (fixed deposits) for their fund needs.

Housing and Home Loans

The customer, however, is being affected as some banks are denying long-term, fixed-rate home loans. This is even as customers are being advised to lock-in long-term loans at the current fixed rate of interest as rates are seen to have bottomed out.

"We are rejecting applications of customers asking for fixed rate loans beyond five years as we cannot reprice assets (fixed rate home loans in this case) even as our cost of funds get repriced," said the head of retail assets at a new generation private sector bank.

Most banks, with the exception of ICICI Bank, do not have access to funds beyond five years. Some of the large public sector banks are equally adverse to giving loans beyond 10 years.

Said a senior PSU bank official on condition of confidentiality: "We do not give 15-year loans on a fixed rate basis."

Other banks like IDBI Bank never went in for a fixed rate loan product. "This was a prudent step we took because finally we have to see to our business. Public sector banks can be refinanced by the government due to the ownership pattern," said IDBI Bank regional head corporate banking Hemant Pardikar.

Such a benefit is not enjoyed by private sector banks. Housing finance companies like Housing Development Finance Company have always been offering fixed rates loans.

For the last 25 years HDFC has been able to sustain its performance largely on the back of its ability to access long-term funding, said HDFC managing director Keki Mistry.

State Bank of India official said: "While we welcome customers to opt for fixed rate home loans, we are not advocating this as we feel a soft interest bias will continue."

At the same time, SBI did not reduce its home loan rates even as other market leaders -- ICICI Bank and HDFC -- dropped their rates in a move to capture greater customer base late last calendar year. Banks want to protect their balance sheet against any asset-liability mismatch.

"We do not wish to get stuck offering low interest rates looking at the current economic condition being in a state of flux," said a SBI official.

In effect, it is all a question of funding mix. Banks' funds are primarily short-term in nature.

In contrast, housing financial institutions like HDFC has long-term funding through retail term deposits of up to seven years, bonds of up to 10 years, international funding of even 20 years and beyond, as well as domestic term loans from institutions of 10 years.

This enables housing finance companies to continue to offer fixed rate loans, while some of their bank counterparts have shown aversion to offer the product.

"I see the housing finance market continuing the present pace of growth. Players who are able to provide all options and innovate will benefit," said Mistry. Today the problem is not as grave since over 90 per cent of the home loan market operates on variable rate of interest.

However, with global interest rates hardening — Bank of England and Bank of Australia both hiked their rates — India too could see interest rates rising, especially in light of improvement in credit offtake.