Home loan firms in no mood to cut rates

In the last few weeks Public sector banks have announced of lowering home loan rates after a slew of measures by the Reserve Bank of India (RBI), but housing financial companies (HFCs) are yet to take decision on the issue.

According to HFCs the cost of funds is showing no signs of reduction since banks are still charging around 12-13 per cent, which is higher than the average lending rate of HFCs.

For instance, HDFC and LIC Housing Finance Company, the two big house financing companies together account for over 70 per cent share of the HFC market and charge around 11.5 per cent, whereas home loans from Dewan Housing Finance Company costs between 12 and 14 per cent.

“Our interest rates are a function of our cost of funds. We have always passed on the benefit of lower cost of funds to our customers and we will continue to do the same. As of now, we have not seen interest rates coming down even though RBI has taken steps to provide liquidity. The issue today is not of liquidity, but of credit and until it is made available, it would be difficult for anyone to bring down interest rates,” said HDFC Joint Managing Director Renu Sud Karnad.

“With banks cutting home loan rates, there is an expectation of rate cut in the housing sector, but our cost of funds still remains high. In the foreseeable future, there is no scope for reduction in lending rates,” added LIC Housing Finance Chief Executive Officer R R Nair.

HFCs sources said the high cost of funds has affected their ability to compete with public sector banks because the weighted average cost, on an average, is 300 basis points higher. Nair added on the contrary, lending rates are 50-100 basis points higher than those of public sector banks.

“We are lending to NBFCs at about 13 per cent, which will not come down as we consider it as a high-risk sector,” said an executive of a large public sector bank.

As per the industry approximate calculation, HFCs comprise over 40 per cent of the Rs 1,20,000-crore housing finance market. According to executives of these companies said HFCs will now account for 15 per cent of an increase in the pie as against 25 per cent in 2007-08.

Recently the National Housing Bank (NHB) had even raised the refinance rate to up to 12 per cent from around 9 per cent which also did not help the cause of HFCs.

In the current circumstances the bigger players, backed by strong background, are still finding difficulty to sustain the higher cost of funds, thus their smaller peers are finding it even more tough to operate.

“The recent measures by the regulators have not translated into the availability of credit from banks. We operate in the lower-income group, with an average loan ticket size of Rs 6-6.50 lakh with a very low margin. So, if things do not improve soon, we will be left with no choice, but to increase lending rates,” said Dewan Housing Finance Vice-Chairman and Managing Director Kapil Wadhawan.

Wadhawan confessed that in the current year, the distribution growth has slowed down compared as compared to the last year.

“The real estate market is reeling. So, the demand is bound to come down. But, we hope to grow at around 18-20 per cent in incremental disbursement this year compared with over 25 per cent growth last year,” he added.

LIC Housing Finance giving loans to builders

The expectations have grown high regarding the downward slope in the interest rates of home loan after the cut in repo rates. Therefore LIC Housing Finance is distributing more loans to builders/developers who comprise to 6% of their business as against individuals which frame up to 94% of their business.

R.R. Nair, director and chief executive, LIC Housing Finance informed that, “We are supporting the builders and developers by funding their upcoming projects to support individuals to afford real estate properties. This will, in due course, result in escalating business in our home loan segment”.

According to latest reports builders are now negotiating prices with buyers, though they are still refusing to reduce property prices officially. LIC Housing is offering easy and hassle-free loans to builders (for new projects) with an aim to encourage builders to reduce prices to a reasonable level.

The main idea behind the move in focus is to encourage individual buyers to book properties. The objective is clear in the loan disbursement target set by the company for the current fiscal. By the end of the current fiscal the company plans to distribute Rs 8,000 crore in home loan segment and Rs 2,000 crore loan to builders, as against Rs 5,900 crore and Rs 1,200 crore respectively in the last fiscal 2007-08.

Up till now, LIC Housing has distributed Rs 5,000 crore, of which Rs 500-Rs 600 crore has been given to builders. Furthermore, it has already sanctioned Rs 6,000 crore loans for which disbursement is due.

In the words of Mr. Nair, this strategy can originate as “loan on tap”. “When we give loans to builders, we also make soft approach to their buyers to take home loans from us. The builder himself shows the way, although it is not a compulsion for the buyers,” he explained.

LIC Housing will be providing funds to builders in all projects sizes--big, medium and small. As per information available from sources it has allocated funds to real estate projects of Rajeha Builders, Sheth Builders and is also in the process of loaning money to Sriram Builders. But Mr. Nair refused to comment on these developments.

While distributing loans in this distressed economic situation, LIC Housing is taking certain precautionary measures. At present company is funding estate projects mostly in groups with other financial institutions like HDFC, SBI, Punjab National Bank, Axis Bank, Central Bank. “This strategy was framed to distribute the risk factor, especially in this downturn market. In a big project of Rs 2,000 crore, if all institutions contribute partly, the risk factor is mitigated on pro-rata basis,” Mr. Nair said.

The company also makes sure that the asset value of the securities given by the borrower as collateral should be twice the loan value. Thirdly, it is carefully examining the cash flow of the builders keeping in mind of the current depression. LIC Housing also do the study of the neighborhood to determine the rationale for pricing a property.