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lending, at least in the near term. Surprising, isn’t it?
Even as the Reserve Bank of India (RBI) has made it mandatory for commercial banks to have a base rate below which they are prohibited to lend to customers, barring a few select segments, the National Housing Bank (NHB), is not yet convinced that a similar system should be immediately be made applicable for HFCs.
So, why is NHB not taking the cue for a transparent reference benchmark for the housing finance companies? NHB, the regulator for HFCs and a subsidiary of the RBI, has not come to a definitive conclusion that this would be the right way to go, at least not immediately.
The regulator feels that a sudden shift, as a knee-jerk reaction to developments in the banking sector, might upset the business plans of the entities regulated by it. “We will like to wait and watch and see the situation as it unfolds in the banking sector for some time before taking a view on whether a similar floor rate should be made applicable for HFCs,” S Sridhar, chairman and managing director, NHB, told FC Build.
Sridhar, who is also the chairman and managing director of Central Bank of India, said that the possibility of having a base rate for the HFCs cannot be ruled out for the future.
“It is not that we cannot have a base rate for the HFCs, but we have to see how far it is for the benefit of the system,” he said.
RV Verma, executive director, NHB, who is Sridhar’s second-in-command as the housing finance regulator, pointed out that the decision on whether to have a base rate for HFCs has to be well thought out since the business dynamics of the sector is quite different from that of the commercial banks.
“Applying a base rate across housing finance companies without a proper thought might have disruptive effect on the system. We would like to wait for a couple of quarters and see how the base rate system works in the banking sector and then take a call on the matter. There are many issues such as cost of funds and the asset-liability mix of each business. We have to analyse each of these before we take a firm decision on whether such a system is beneficial for the housing finance companies or not,” Verma said.
Srinivas Acharya, managing director, Sundaram BNP Paribas Home Finance, agreed with the housing finance regulator’s views. “Since housing finance companies borrow from diverse sources, the cost structure of each of them could be widely different. Hence the base rates could be in a wide range. As far as our own borrowing is concerned we get most of funds through refinance from NHB itself. We get 8-9 per cent of our funds from banks while some of the funding comes from mutual funds and other institutional sources,” he said.
Acharya said that even if the base rate of a housing finance sector were to be linked to the base rate of one bank, it would not be easy to decide on which one to follow. “It would be difficult to select the bank to which the base rate could be linked,” he said.
While making the base rate system operational with effect from July 1, 2010, the RBI had provided an illustrative mode for banks to arrive at the rate, which requires complex mathematical calculations based on several variables including the cost of deposits, average return on net worth and the negative carry on the statutory reserve requirements that commercial banks have to maintain with the central bank.
For starters, banks have fixed their base rate within a range of 5.5 per cent to 8.75. While the range for public sector banks is 7.5 per cent and 8.75 per cent, private banks have set their base rate between 7 per cent and 8.75 per cent. Foreign banks have a range of 5.5 per cent and 8.75 per cent.
However, for borrowers who have contracted their loans prior to July 1 from a bank on a floating rate, the loan would continue to be linked to the benchmark prime lending rate (the rate at which the banks used to lend to their best-rated borrowers).
The dual system would continue till a customer opts to switch to the base rate-linked loan or the RBI announced a sunset clause for the earlier system.
Verma said that shifting to a base rate might be easier for the banking sector compared to HFCs since banks have a similar cost, while there is a wide difference in costs of funds among housing finance companies.
“Banks have a similar cost of profile such as savings deposit and current account deposits. In contrast, HFCs are more heterogeneous in their cost structure,” he added.
In fact, the banking sector’s lending rates have a major impact on the HFCs since a majority of its funding is done through lending by banks themselves, Verma said. “More than half of HFC funding as an industry comes from banks themselves,” he pointed out.
According to an Icra report on the Indian mortgage market, nearly 59 per cent of the borrowing by HFCs at the end of December 2009 was from commercial banks. “While the bigger HFCs have more diversified funding profiles, the smaller ones continue to depend largely on banks and National Housing Bank (NHB) to meet their borrowing requirements,” the report mentioned.
Icra says that NHB refinance could remain as one of the major sources of long-term funding for HFCs. “Under normal circumstances, NHB is likely to remain an important source of long-term funds for the smaller HFCs, given that the institution mobilises funds at competitive rates and on-lends the same while maintaining thin interest spreads because of its developmental role in the mortgage finance market,” it said.
On another front, HFCs also rely substantially on raising deposits from the market, some of which might be contracted on relatively higher rates depending on the credit rating.
“Most HFCs have increased their emphasis on mobilising public deposits to diversify their funding profile, as they perceive deposits to be a more stable source of funding (especially after the liquidity crisis of October 2008). Despite these initiatives, HFCs are likely to remain reliant on wholesale funding sources, therefore a prolonged tightness in liquidity at the systemic level could affect the cost of funds and hence the competitive position of the HFCs,” Icra mentioned.
According to NHB’s Verma, besides cost of funds, the other factor that requires to be taken note of while thinking of a base rate structure for HFCs is the difference of lending patterns with banks.
“Banks’ lending consists of a diverse basket of borrowers with different tenure of loans. However, HFCs lend only to housing and the minimum duration of the loan is 8-10 years. There are no short-term loans as is extended in the banking sector. We have to see the asset-liability profile of the industry,” he said.
For the time being, housing finance companies appear to be in for a freer environment on this aspect compared to banks and can enjoy their living without a floor.
