"There will be an incentive for banks to provide these loans at competitive rates as it will help meet our priority sector (loan) targets.
"To that extent, interest rates on such loans may come down," Union Bank of India executive director SC Kalia told Business Standard.
Some bankers are of the view the move will also help lenders meet their priority sector commitments as a large part of their housing loan portfolios comprise of loans under Rs 25 lakhs.
For instance, State Bank of India, the country's largest lender, has said almost 80 per cent of the its home loans were below Rs 10 lakhs (Rs 1 million).
The Budget proposes to classify housing loans up to Rs 25 lakhs as priority-sector advances. So far, loans up to Rs 20 lakh were considered for priority-sector calculations.
The government has also proposed an interest subsidy of one per cent on loans up to Rs 15 lakhs (Rs 1.5 million), in cases where the cost of the house did not exceed Rs 25 lakhs.
As of now, interest subvention is offered on home loans up to Rs 10 lakh, where the cost of house was under Rs 20 lakhs (Rs 2 million).
Bankers said the move will lead to lower loan costs.