Daijiworld Media Network – New Delhi
New Delhi, Aug 17: India’s largest state-owned banks are tightening the reins on home loan pricing, raising spreads over benchmark rates to shield their margins as policy rates continue to fall.
The State Bank of India (SBI) and Union Bank of India have widened their mortgage spreads, resulting in higher costs for new borrowers. SBI’s home loan rates now range from 7.5% to 8.7%, up by 25 basis points, while Union Bank has raised its rate to 7.45%. More public-sector lenders are expected to follow suit.
This shift comes as the Reserve Bank of India (RBI) has cut the repo rate by 100 basis points this year, with further reductions possible. Unlike earlier cycles, where new borrowers benefited from lower rates, the present scenario is inverted—existing customers enjoy rate cuts under RBI’s transmission rules, while new customers face higher borrowing costs.
The asymmetry reflects sticky funding costs. State-owned banks, which depend heavily on small savers’ fixed deposits, find it harder to reduce deposit rates. With margins under pressure, they are now prioritizing profitability over market share.
For years, public-sector banks drove mortgage growth by aggressively undercutting private lenders. Between FY22 and FY25, SBI’s mortgage book grew 14%, while Bank of Baroda and Punjab National Bank expanded by 18%, outpacing private rivals like ICICI Bank and HDFC Bank. However, with lending rates falling and deposit costs staying firm, this strategy has become less viable.
For SBI, which holds an Rs 8 lac cr home loan book, even a marginal increase in spreads significantly impacts profitability. A senior private bank executive noted it is “impossible to earn decent returns” on a 7.3% home loan rate.
Industry data reflects the cooling trend. Home loan growth slowed to 9.6% in the year to June 2025, down sharply from 36.3% a year earlier.
By raising spreads, SBI and Union Bank are signalling that India’s mortgage boom is entering a new phase—less about cheap credit and rapid expansion, and more about sustainable returns and margin protection.