The country's largest home loan provider, ICICI Bank, has reduced interest rates on floating rate home loans below Rs 20 lakh by 50 basis points for new customers.

This is the first time in over two years that ICICI Bank [Get Quote] has reduced any of its lending rates.

The effective rate of interest would be 11.50 per cent against 12 per cent on loans of Rs 20 lakh and above, ICICI Bank said, adding the decision on differential pricing was taken two months ago.

Home loans below Rs 20 lakh qualify as priority sector loans. The decision is part of the differential pricing banks are introducing for home loans that qualify for priority sector, after the Reserve Bank of India reduced the risk weight for capital allocation on home loans below Rs 20 lakh to 50 per cent from 75 per cent in its annual policy statement.

The reduction in risk weight has freed around Rs 600 crore worth of capital of the bank.

Before ICICI Bank, public sector majors like Punjab National Bank [Get Quote], Union Bank of India [Get Quote] and Canara Bank [Get Quote], among others, had differential rates of interest for loans below Rs 20 lakh.

The bank's home loan portfolio on March 31, 2007, was around Rs 63,500 crore, of which half the loans were below Rs 20 lakh.

ICICI Bank has around 800,000 home loan customers and the average loan size is Rs 10 lakh. Three years ago, the average ticket size of a home loan from the bank was Rs 5 lakh.

Since May 2006, the bank has raised its home loan rates 4 percentage points. The bank's interest rate on fixed rate home loans is 14 per cent.

ICICI Bank believes that despite the increase in interest rates during 2007, retail credit continues to have robust long-term growth potential, driven by rising income levels, a favourable demographic profile and wide availability of credit.

The bank's retail disbursements in 2006-07 were about Rs 77,700 crore, against Rs 62,700 crore in 2005-06.

Home loans account for over half its retail loans.