MUMBAI: With banks facing continuing pressure in their most important profitability metric net interest margin (NIM), which on average declined 23 basis points to 3.3-3.5 per cent in the June quarter at the system level, following a steep 100 bps reduction in the repo rate that’s benefited existing borrowers, banks have begun hiking new home loan rates to protect their margins.
In a signal that home loan rates are heading north, coming just ahead of the festive seasons, the largest mortgage player SBI with an AUM of Rs 8.5 trillion, has increased the rates by 25 bps for new home loan borrowers and the second one to do so is Union Bank of India that has upped by 10 bps to 7.45 per cent.
Margin pressures were evident in Q1 results with the sequential fall in NIM varying between 1 bps and 67 bps across the lenders, but on average, at the system level the NIM declined 23 bps in the June quarter. While SBI saw its NIM falling to 3.02, down 32 bps, HDFC Bank’s slipped to 3.35 per cent from 3.46 per cent, ICICI’s slipped by 7 bps to 4.34 per cent, and Axis Bank saw NIM falling by 17 bps to 3.80 per cent. Among the state-run lenders, Union Bank’s NIM declined to 2.76 per cent, down 11 bps.
What is more important is that this shows a strategic shift—normally banks used to charge less from new customers and keep the rates higher for existing customers. But they lost that pricing freedom after the Reserve Bank forced them into the repo-linked pricing mechanism, wherein, when the repo rate is cut, the entire reduction has to be passed onto existing customers within a month, if not immediately. And that’s why the rate hikes by SBI and Union Bank indicate a strategic shift away from low-margin retail home loans, with a renewed focus on more profitable lending segments.
Public banks have been pushing home loans at wafer thin margins in recent years, which saw them becoming the largest players in the mortgage space with HDFC being the only exception, thanks to its merger with its parent, yet lost the numero uno position to SBI in recent quarters.
According to RBI data, home loans grew by just 9.6 per cent in the year to June 2025, a sharp slowdown from 36.3 per cent growth recorded the previous year. Over the past four years, government-owned banks have steadily gained market share. Data from credit bureau Crif Highmark shows that the share of new home loans by value for public sector banks rose to 43 per cent in FY25 from 34 per cent in FY22. Over the same period, the share for private banks fell to 29.8 per cent from 42.6 per cent.
Pricing pressure has intensified following the 100 bps cut in the repo rate by the Reserve Bank between February and June, bringing it down to 5.5 per cent .
In a negative surprise, SBI increased the pricing of new home loans by 25 bps to 7.50-8.70 per cent, from 7.25-8.45 per cent earlier with borrowers with lower credit scores paying in the higher band. The new rates are applicable for loans disbursed from August 1, according to an SBI official, who attributed the increase to "home loan being a low-yielding product, the bank has so decided to increase margins with higher pricing on new loans with low credit scores. But this change applies only to new customers and will not impact the Rs 8.5 trillion of outstanding loans."
Union Bank has also reportedly increased the rate by 10 bps to 7.45 per cent. Industry sources say other public sector banks are also likely to follow the industry leader as their margins are under more pressure than their private sector peers.
The second largest state-run lender PNB’s home loan rates starts at 7.45 per cent, Canara Bank’s varies from 7.40 per cent to 10.25 per cent and Bank of Baroda’s interest rates ranging from 7.45 to 9.20 per cent for both salaried and non-salaried individuals.
On the other hand, the second largest mortgage player, HDFC Bank, with a loan books of Rs 8.4 trillion as of the June quarter, offers new home loans starting from 7.90 per cent (this rate applies to new home loans, balance transfer loans, house renovation loans, and home extension loans) the second largest private sector bank, ICICI Bank, offers starts at 7.70 per cent.
In comparison, private lenders such as HDFC Bank, which is the second largest mortgage player with over Rs 8.4 trillion in home loan assets, ICICI Bank and Axis Bank currently offer home loans with starting rates of 7.90 per cent, 8 per cent, and 8.35 per cent, respectively.