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ICICI Bank hikes interest rates on home loans

ICICI Bank has increased the rate of interest on home loans by 1%

ICICI Bank has announced that it is increasing the rate of interest it charges on housing loans by 1%.

The floating rate of interest has been increased to 13% from 12%.The fixed interest rate has been increased to 16.5%.

This change in interest rate is effective October 10, 2008.

The bank has clarified that this hike would be applicable only for new customers. This increase would not apply to the bank’s existing home loan customers – the existing loans have been spared from this hike.

Reasons for the increase in interest rate

The Reserve Bank of India (RBI) has recently taken steps like reduction in repo rate and reduction in Cash Reserve Ratio (CRR), which would, in-effect, reduce the prevailing interest rates.

In such a scenario, why is ICICI Bank increasing its rates?

One explanation is that the bank is simply passing on its higher cost of borrowing.

The bank pays upto 10.5% interest rate on fixed deposits (FDs) – 11% in case of senior citizens. This is more than most other banks. Thus, it is forced to charge a higher interest rate on the loans it gives out.

Another possibility is that the bank wants to give a low priority to the home loan segment – the bank already has the largest home loan portfolio in India, and it doesn’t want to encourage its expansion in this difficult market scenario where defaults on home loans are expected to shoot up.

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