Loan demand dips as interest rates hit a five-year high

The recent surge in home loan interest rates has cast a shadow over the domain of home loan demand. By the end of the quarter ending in June 2023, the collective outstanding home loans provided by banks had reached Rs 19.9 trillion, indicating a slow quarter-on-quarter (QoQ) growth of 2.7%. This rate of expansion, represents the slowest progression since September 2021. While the QoQ growth in home loans has averaged around 4% over the past seven quarters, this recent manifestation has seen it dip below the 3% threshold for the first time in two years.

Experts attribute the lending slowdown to relentless interest rate hikes on home loans. The weighted average lending rate on home loans has surpassed the 9% threshold, presently standing at 9.12%, a peak unseen in five years.

While home loans remain a fundamental need in our country, most availing this facility are sensitive to interest rate fluctuations. During periods of ascending interest rates, a segment of borrowers tends to moderate their demand for home loans. Conversely, when interest rates chart a downward course, borrowers tend to lean towards slightly larger residences.

Banks have implemented interest rate hikes on home loans in response to a sequence of increase in the repo rate by the Reserve Bank of India (RBI). The RBI's policy rate has undergone increments totaling 250 basis points since May 2022. The RBI's data reveals that the weighted average lending rate on home loans stood at 7.34% at the end of March 2022.

Subsequently, this rate has consistently risen, underscoring the fact that banks are transmitting the increased cost of funds to borrowers through higher interest rates on home loans.

According to experts, the span of increased interest rates is anticipated to persist in the near future, with the possibility of a decline in rates seen only in the second half of the ongoing calendar year. The expected reduction in interest rates would stimulate demand for home loans.

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Loan demand dips as interest rates hit a five-year high

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