The Hindu Business Line : Reduction in rates will boost home loan demand: LIC Housing

Mumbai, Dec. 21 Heeding the Government advice, public sector banks had cut home loan rates last week. Following this, leading housing finance companies announced similar rate cuts by the week-end.

The question is will it bring cheer to home loan seekers and boost demand in the housing sector. “Yes, provided there is a simultaneous correction in property prices,” says Mr R.R.Nair, CEO of LIC Housing Finance Company. With inflation coming down and cost of fund easing, the housing sector should see brighter days ahead, he said.

LIC Housing cut its home loans rates to 9.25- 9.75 range from its uniform rate of 11.5 per cent.

Mr Nair spoke to Business Line on the rationale and impact of the rate cut. Excerpts:

Will the rate cut affect your margins?

We hope to get refinance at 8-8.5 per cent from National Housing Bank under the government’s growth package as well as under the rural housing scheme. This could partly offset our cost. We also need to improve operational efficiencies. The reduction in rates is also expected to boost the demand for home loans and the volume growth could give us some extra comfort. We will try to maintain our margins as we have to take care of our investors’ interests too.

The actual impact of the latest rate cut will be felt only by the next quarter. With inflation coming down, it appears that the cost of funds could come down further.

Our main source of funds is borrowing from markets — from banks, financial institutions, and raising funds through NCDs and CPs.

And as far the ECB route is concerned, the RBI has fixed the rate at LIBOR+200 bps and it is subject to certain other conditions. But funds are not available at the rate prescribed by the RBI.

How competitive are you vis-a-vis banks after the rate cut?

Around 80 per cent of LIC Housing Finance’s portfolio is in the category of loans upto Rs 20 lakh and the move by the public sector banks would pose a business challenge to us. We have to revise our business models and our lending rates.

There has always been a difference in the rates offered by banks and those by HFCs. People are willing to pay more to avail themselves of hassle-free services provided by HFCs. Yet, we need to be competitive in our service and rates to continue in the business.

With the slowdown in the economy, do you see the number of defaults going up?

We have adopted a prudent way of disbursing our loans. And since 90-95 per cent of our loans are in the end-user segment, we are in a relatively better position. We are aiming to achieve an NPA level of 1.5 per cent, as compared with 1.7 per cent last year.

What is the size of your total portfolio?

The company’s disbursements, both sanctions and approvals, have been growing at around 30 per cent. We expect the disbursements to improve with the cost of funds coming down. We have set a target of disbursing Rs 10,000 crore this fiscal, 40 per cent higher than last year.

With property prices continuing to be high, do you think you can achieve the target?

We are a pan India organisation, so slowdown in demand in certain areas is unlikely to affect us. Besides, in places like Mumbai, property prices have come down at least by 15-20 per cent.

How has the demand been for project finance? Do you feel it’s risky to lend in this segment?

There is a lot of demand for project finance. Though the business has an inherent risk factor, we feel it is a good opportunity to do business as we have the option for cherry picking. Besides, there are still many builders who have strong balance sheets.

When do you plan to launch your reverse mortgage scheme?

We are on course to launch our reverse mortgage product in a month’s time. As per the current guidelines, a customer who mortgages his property to avail himself of a reverse mortgage loan receives monthly instalments for a period of twenty years. The National Housing Bank is in discussions with insurance companies to ensure that the payments are made lifelong. The scheme would be available all over the country and we would give final touches to our product after the link-up with insurance companies is finalised.

What is the progress on LIC Financial services?

LIC Financial Services has opened an office in December and started operations in a small way. We are in the process of recruiting people for the venture. Besides, housing finance products, the company would sell other products such as mutual funds and insurance. We have obtained licences from both IRDA and AMFI. The company will be officially launched once the recruitment process is complete.

Is it the right time for the financial service venture to start operations?

I think it is a good time to start operations because during a downturn investors would be more choosy; they look for genuine products and trusted people. As the company will sell third party products, it would create an additional channel for us for revenue generation.

What is your outlook for the third quarter?

Though our net interest margin was slightly down in the second quarter due to higher cost of funds, I expect the third quarter result to be in line with our last year’s performance, or perhaps better.