What arbitrage?

There is very little to justify the SBI Chairman’s observation that the housing loan industry is suffering from ‘regulatory arbitrage’ due to multiple regulators overseeing it. At a recent banking conference, he made a strong pitch for housing finance companies to be regulated by the Reserve Bank of India (RBI) rather than the ostensibly more tolerant National Housing Bank (NHB). However, for regulatory arbitrage to exist there must be material differences in the regulatory obligations of housing finance companies (HFCs) and banks with respect to their home loan business.

In truth, there is hardly any. On all critical aspects of their operations, whether product structure, provisioning norms or recognition of bad loans, HFCs are subject to the same rules as banks. What seems to have provoked the SBI chairman’s statement is the RBI’s recent moves to tighten regulations for banks offering teaser loans. But whenever the RBI has announced any changes for banks, the NHB has faithfully followed suit with similar rules for HFCs. In fact, in certain aspects the NHB’s requirements are tighter today than those stipulated by the RBI. While the RBI has barred banks from levying pre-payment penalty on floating rate loans, the NHB has forbidden such penalties on both floating and fixed rate loans. The only area in which banks carry a regulatory obligation that their rivals don’t is in the maintenance of a Cash Reserve Ratio. But this is justifiable, given that banks, unlike HFCs, enjoy access to low-cost funds in the form of current and savings account balances from the public. It is also not clear how HFCs or their customers are actually exploiting this so-called regulatory ‘arbitrage’. Despite making a late entry into the home loan market, banks have managed to corner a two-thirds share of home loan disbursements, hardly indicative of being hamstrung by tighter regulation. Nor are HFCs attracting sub-prime borrowers or charging them higher rates. With their gross non-performing assets at less than 1 per cent, HFCs, in fact, seem to enjoy better loan book quality and lower margins than some public sector banks.

Given this, there is no pressing need to revisit the regulatory framework for HFCs, which will in any case be re-examined when the government takes up the issue of a unified regulator suggested by the Financial Sector Legislative Reforms Commission. Instead of quibbling about regulators, it would help if home loan providers took more serious note of the RBI’s recent suggestions to come up with more transparent, fixed rate products that offer a measure of predictability to the home loan borrower. Taking a home loan is often the biggest financial commitment retail investors make. It is unfair to expect them to bear the entire burden of fluctuating interest rates of a 10 or 15-year home loan.