MUMBAI: Banks are raising their spreads above home loan rates to safeguard their margins. SBI and Union Bank of India have increased their mortgage spreads as reference rates decrease. With the repo rate already reduced by 100 basis points this year, further cuts could be on the horizon. Unlike previously, when lower rates primarily benefited new borrowers while existing ones paid higher, the current environment sees new borrowers facing increased costs, despite banks being required by RBI regulations to pass on rate cuts to existing customers.
This discrepancy arises from persistent funding costs. Reducing deposit rates remains challenging, particularly for state-owned banks that cater to numerous small savers reliant on fixed deposits. Consequently, banks are selectively widening spreads amidst pressure on their margins. SBI’s new home loan rates range from 7.5% to 8.7%, which is 25 basis points higher than before, placing more burden on less creditworthy borrowers. Union Bank has raised its rate to 7.45%, with other public-sector lenders expected to follow suit.
This shift represents a strategic change. In recent years, state-owned banks gained market share by underbidding private competitors. Between FY22 and FY25, institutions like SBI, Bank of Baroda, and Punjab National Bank expanded their mortgage portfolios more quickly than ICICI, HDFC Bank, or Axis. Public sector banks leveraged their extensive branch networks to offer mortgages at very low spreads, often using them to cross-sell other products and attract deposits.
However, that approach may no longer be viable. As lending rates decline and deposit costs remain high, home loans are becoming a burden on profitability. For SBI, which holds Rs 8 lakh crore in home loans, even minor adjustments in spreads significantly impact margins. A private sector bank executive remarked that achieving a decent return on asset with a 7.3% home loan rate is nearly impossible.
Conversely, private banks have hesitated to match the aggressive pricing of their public sector counterparts. While PSU banks have seen rapid growth—SBI at 14% and both BoB and PNB at 18%—this impressive expansion now faces the reality of squeezed net interest margins. Industry-wide, home loan growth has slowed to 9.6% in the year ending June 2025, a sharp decline from 36.3% the year prior.
The decision by SBI and Union Bank to hike loan rates indicates an acknowledgment that the mortgage boom cannot persist at the expense of profitability. With policy rates likely to decrease further, banks seem to be resetting their priorities: focusing on margin protection over growth. If other banks follow suit, the home loan market may be entering a new phase, emphasizing sustainable returns over merely cheap credit.
