Banks feel housing finance companies have more leeway in loan pricing
Banks say that there is a regulatory gap between home loan pricing norms by the Reserve Bank of India (RBI) and the National Housing Bank (NHB). Banks, which account for two-thirds of home loans, are governed by RBI’s guidelines, while housing finance companies (HFCs), which provide the remaining one-third of loans, are regulated by the NHB. The RBI has been proactive in pushing banks to lend at market rates by constantly revising the benchmark. This benchmark started with the prime lending rate (PLR), moved to the base rate and later to the marginal cost of lending rate (MCLR). Now, under RBI’s latest directive, banks must shift to a new external benchmark for all retail floating rate loans with effect from April 2019. The external benchmark will have to be either the repo rate, the treasury bill rate or other rates reflecting money market movements. In the case of HFCs, however, floating rates continue to be linked to the decades old PLR. This is why their benchmarks continue to be very high. HDFC has a PLR of 16.75%, which is almost double the rate at which it lends to best customers. Similarly, LIC HF has a PLR of 14.6%. Despite the benchmark rates, HFCs manage to lend cheap by pricing loans at a discount to the PLR. For bank customers, the new pricing model will not bring down interest rates as banks are free to determine the ‘spread’ — the difference between the external benchmark and the rate at which they actually lend. However, it will make transmission more effective as every time the RBI revises rates, or money market rates move, the change will be reflected in home loan rates. But banks point out that HFCs will now have much more freedom in pricing. Banks are hopeful that the NHB will follow the RBI in regulations. In the past, the NHB has followed the RBI on several regulations, including the removal of prepayment charges on floating rate loans and fixing minimum loan-to-value ratios. HFCs say that, in this case, different yardsticks will need to be applied. According to HFCs, they cannot move to an external benchmark because their liabilities are long-term and have a fixed rate, unlike that of banks that are dependent on short-term deposits and see their cost of funds change frequently. The other argument by HFCs is that banks have access to money markets and are directly impacted by any change in the repo rate as they borrow from the RBI. For most HFCs, funding comes from long-term bonds and long-term external commercial borrowing. Even HFCs that have access to retail deposits end up raising relatively long-term funds. While HFCs have the freedom to choose the benchmark, they must price their loans close to banks as it is a very competitive business. With corporate investment not picking up, banks have been aggressively pushing home loans — the fastest growing segment.
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