LIC Housing Finance, India's fourth-largest mortgage lender, for one, is working out a new floating rate product with an initial interest rate of 10.4% for loans up to Rs30 lakh, to be launched in January, and will discontinue its fixed-cum-floating rate home loan product 'New Advantage 5' by this month-end.

Though the finer details of the plan are still in the works, V K Sharma, director and CEO of LIC Housing Finance, said the special offer will be for the first three months of loan repayment, after which the interest rate will be linked to the prime lending rate (PLR).

The company's current PLR is at 14.40%, but Sharma feels that will start falling soon. "We are the last ones to load our customers with higher rates and the first ones to reduce interest rates once the Reserve Bank of India (RBI) cuts."

Sharma expects the RBI to begin cutting the repo rate by the beginning of next fiscal.

He feels competitors will follow suit and offer customers much cheaper products in the months to come.

Financial planners, however, believe other lenders will not be keen to follow suit.

"I feel one should wait and watch the RBI's move first and then decide whether they want to go for such a product. If customers get attracted to such flamboyant housing loan products without having their investments in place and with inadequate savings, they will be in a fix," said Kalpesh Ashar, a financial planner.

LIC Housing Finance's current product, 'New Advantage 5', launched in September, has managed to bring in business worth Rs1,500 crore, said Sharma.

Under the fixed-cum-floating rate product, the customer is given a one-time offer to convert to a fixed rate loan within the first year of the disbursement of the loan. Customers taking this option will get to convert their loans into a fixed format for five years. Under this, the fixed rate for the first five years is 11.15% for loans up to Rs30 lakh.

Analysts, however, feel that it may be too soon to come up with such a cheap product. "The interest rates are still at staggeringly high levels. If companies come out with lower rate products now, it may cause considerable stress on their net interest margins (NIM)," said an analyst with a local brokerage.

NIM is the difference between the interest earned and interest paid as a percentage of the bank's assets in a given period.
Sharma, however, isn't bothered. "Our current NIM is at 2.5% and we hope to maintain it at 2.7% at the end of the year," he said. The main reason for this would be the declining cost of funds, believes Sharma. The company's average cost of funds in the second quarter was at 10.25%, while in the current quarter, it has been in the 9.75-9.9% range. Sharma is hopeful the cost of funds will come down in the next quarter.