The current demand for bank credit is being driven by the retail segment, particularly housing loans, which, given their multiplier impact, are sustaining industries with backward and forward linkages in steel, cement, transport and construction. As India’s growth picks up and urbanisation expands, demand for housing will rise sharply.

Housing Finance Companies (HFCs) have been in the field for several decades and banks have been active lenders for home loans only in the last ten years or so. But the demand is now largely met by commercial banks which account for around 60-62 per cent of the home loan market in India, ahead of HFCs which hold about 36-37 per cent share, with the remaining 1-2 per cent being held by co-operative banks and Regional Rural Banks. Second, the average size of home loans by public sector banks is around Rs 12-15 lakh while it is around Rs 20-25 lakh for HFCs, with some HFCs focusing only on high value customers, where loans touchRs 75 lakh to Rs 1 crore. While banks have an obligation to affordable housing as loans below Rs 30 lakh are classified under priority sector, HFCs have no such obligation. Third, banks with their pan-India presence extend housing loans to customers across the country, while HFCs, with the exception of a few such as HDFC and LIC Housing, are concentrated mostly in the developed regions.

To meet the growing demand for housing in a fair and transparent manner, there is no doubt that the market for housing has to be well regulated. The experience of the US sub-prime market has important lessons from a regulatory point of view.

Of course, there is hardly any difference in the regulatory powers vested in RBI and NHB, which narrows the scope for regulatory arbitrage. With regard to interest rate and prudential regulations when RBI issues some guidelines, the NHB follows suit, or at times takes the lead like in waiver of prepayment penalty on home loans. In this case, the NHB moved first and then the RBI issued its notification asking banks to waive prepayment penalty. While both RBI and NHB are regulators for home loans, NHB also has a mandate to raise money overseas to refinance loans to HFCs and banks.

Given their expertise and financial muscle, banks are more competent to execute this mandate, which has a forex risk and could have implications for financial stability. Therefore, in the context of preventing lopsided development, the demand for a single regulator for the home loan market is timely.

(The author is former Chief Economist, SBI.)

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