The Hindu Business Line : `Home loans may turn dearer'

The incremental return on equity for banks on its housing finance business is at 9 per cent as compared to the return on equity of 18.8 per cent in the earlier fiscal.

For housing finance companies, this is lower at about 6.93 per cent as against 20.53 per cent in the earlier fiscal.

"Such low returns are unsustainable in the long run and could push up interest rates by 50 to 100 basis points. This increase could be lower if the players are able to contain their non-performing loans (NPL) in housing finance portfolio,'' Crisil said in a news release.

The incremental returns are low because competitive pressures in the housing finance industry have driven down yields and as NPLs are fairly high. Housing loan rates have fallen by about 675 basis points since April 2000, which is higher than 582 basis points decline in the benchmark 10-year Government securities (G-sec) rate (taken as the risk-free rate).

In the last year itself, as competition has intensified, rates have declined by 250 basis points. NPLs too are quite high at about 3.3 per cent today.

In contrast, housing finance players in a developed country such as the US have NPLs of only 0.78 per cent, Crisil said.

More Stories on : Interest Rates | Housing Finance

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