LIC Housing Finance is planning to float a separate arm for undertaking home loans business in the North-Eastern part of the country.
The second largest standalone housing finance company of the country has hit upon this strategy as local laws in some of the North-Eastern States do not allow creation of a mortgage (to convey a property as security to a lender against a loan).
The operations of the proposed arm, which will be in the nature of a special purpose vehicle (SPV), will be limited to the acquisition and financing of specific assets in the North-East.
A SPV is normally a bankruptcy-remote entity whereby its insolvency will have marginal or no impact on the parent company, or other group entities.
According to V.K. Sharma, Managing Director and Chief Executive Officer, LIC HF, “In the North-East, we have a typical problem. You cannot create mortgages because of local laws. So, there is a hindrance in giving loans. But people need loans for building houses. Hence, our Board has given permission to explore the setting up of a kind of SPV for the north-eastern areas of the country.”
The LIC HF chief observed that it is important to create organisations and systems to ensure that those living in the North-Eastern part of the country Arunachal Prades, Assam,Meghalaya, Manipur, Mizoram, Nagaland and Tripura – are absorbed into the national mainstream.
“The SPV will open up an entirely new and promising market in the North-East whereby we can give loans and spread our wings. We will examine if some laws need to be streamlined. If required, we will approach the State Governments to establish a legal system wherein we can conduct business in a proper way so that the people are benefitted.”
The SPV could be in the form of a subsidiary, separate company or a department. LIC HF, which had a mortgage portfolio of Rs 77,812 crore as on March-end 2013, will be putting people for exploratory purpose.
Home loan migration
On banks luring existing home loan customers of rival lenders with lower interest rates, Sharma said, “This kind of situation we have gone through twice in the past. In 2003-04, lot of churning (migration) was triggered by a few banks. At that time also we had been fairly successful and stable. And our customers, more or less, remained with us.”
Referring to a large bank spending crores of rupees on advertisements in the last one year to showcase its home loan product, the LIC HF chief said, “but even after that I don’t think the bank’s growth rate in home loans is more than 25 cent.”
“What this shows is that banks are not tapping new markets. With its huge branch network, lowest interest rate and predatory marketing practice, if the said bank is still logging 25 per cent home loan then our 20-21 per cent loan growth is not bad.”