Public sector banks in India, including State Bank of India (SBI) and Union Bank of India, have widened spreads on home loans despite reductions in policy rates. This move comes as banks contend with rising deposit costs, which have remained sticky even as the Reserve Bank of India (RBI) cuts the repo rate. Analysts say this signals a strategic shift in the home loan market, where sustainable returns are being prioritized over rapid growth or market share.
The repo rate has been reduced by 100 basis points so far this year, and further cuts are expected. Traditionally, rate reductions are passed on to new borrowers, while existing customers may benefit later. Currently, new borrowers are facing higher effective interest rates, reflecting banks’ focus on safeguarding profit margins rather than offering cheaper credit. SBI’s updated home loan rates range from 7.5% to 8.7%, an increase of 25 basis points, while Union Bank’s rates have risen to 7.45%. Observers suggest that more public sector banks may follow suit.
The widening spreads are primarily due to persistent funding costs. Deposit rates, particularly fixed deposits for small savers, have not decreased in line with policy rate cuts, creating pressure on banks’ net interest margins. As a result, banks are selectively raising home loan spreads to ensure profitability. According to banking experts, maintaining acceptable returns on asset portfolios has become difficult at lower interest rates, especially for large mortgage lenders such as SBI, which manages home loans worth around Rs 8 lakh crore.
The shift represents a change from previous strategies, when public sector banks aggressively expanded mortgage portfolios to capture market share from private lenders. Between fiscal years 2022 and 2025, SBI, Bank of Baroda, and Punjab National Bank grew their home loan books faster than private competitors such as ICICI Bank, HDFC Bank, and Axis Bank. Public sector lenders used their extensive branch networks and scale to offer home loans at minimal spreads, often using these products to cross-sell other loans and attract deposits.
However, this approach is proving less sustainable in the current economic environment. As lending rates fall and deposit costs remain high, home loans are increasingly becoming a drag on overall returns. Industry data indicates that home loan growth slowed to 9.6% for the year ending June 2025, down sharply from 36.3% in the previous year. Analysts note that the sector is entering a new phase where profitability takes precedence over sheer volume growth.
Private banks, which historically avoided aggressive pricing, may now see reduced pressure to match public sector spreads, giving them more flexibility in portfolio management. For public sector banks, even modest increases in spreads can have a significant impact on overall profitability due to the large volume of loans held.
The recent actions by SBI and Union Bank signal a strategic shift in India’s mortgage sector. The focus is moving from rapid expansion and capturing market share toward maintaining sustainable returns amid persistent deposit costs. Borrowers may face slightly higher rates in the short term, while banks aim to balance growth objectives with profitability. The home loan market is expected to gradually adjust, transitioning from a credit-driven boom to a more margin-conscious phase.
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