Mid-sized and small housing finance companies (HFCs) want the Reserve Bank of India (RBI) to allow them to impose prepayment penalty on the home loans that get transferred to banks within two years of disbursement.

Low interest rates quoted by banks vis-a-vis the aforementioned HFCs is triggering balance transfer of home loans from the latter to the former.

Moreover, direct sales agents (DSAs), in their eagerness to earn commission, are also encouraging HFC customers to shift their loans.

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So, these HFCs have become a favourite hunting ground for banks to expand their home loan portfolio. HFC customers are seen as low hanging fruit by banks.

Balance transfer, a genuine issue

Subramanian Jambunathan, MD & CEO, Shriram Housing Finance, emphasised that balance transfer is a genuine issue, which has become bigger than what it used be six months back.

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“And, I think, somewhere the regulator must realise that we bring in the customers into the financial system. So, we take the risk. We give the customer his first loan at a time when none of the other lenders are willing to give him a loan…and then somebody like a nationalised bank comes and offers the customer loan at much lower rate of interest and takes him away,” he said.

Jambunathan observed that transfer of home loans within two years of disbursement is not good for the HFC segment because good customers keep going away and the risky ones continue on the books.

So, not only is HFCs’ risk increasing because the good customers go away, it is also unfair to them that other lenders (banks) are allowed to take over their customers.

“I think the only solution to this is to re-introduce the prepayment penalty, in case a borrower exits an HFC before a certain period of time (say, two years),” Jambunathan said.

The issue of prepayment penalty has been discussed at various HFC fora, he added.

The prepayment penalty should cover HFCs costs on the customer as they spend a lot of time and effort in doing credit assessment of the first-time home loan borrowers.

Banks turn aggressive on home loans

Motilal Oswal Financial Services Ltd (MOFSL), in its research report “A Home Run!”, noted that over the past two years, large banks like State Bank of India, ICICI Bank, and Axis Bank have been aggressive in home loans. It was of the opinion that given the lack of growth in corporate lending, these banks are likely to remain aggressive in the foreseeable future.

However, HFCs with strong parentage are able to compete effectively with banks given the sharp decline in their incremental cost of funds (three-year borrowing at about 5 per cent). Given the huge scope of the market, these players have enough opportunity to grow despite the intensifying competition.

“While HFCs are expected to lose market share to banks on the whole, the top two HFCs (HDFC and LIC Housing Finance) should maintain or gain market share,” the report said.

In a report last month, ICRA said the overall on-book housing loan portfolio of HFCs and non-banking financial companies (NBFCs) declined marginally in H1 (April-September) FY2021 owing to the Covid-induced disruptions in the market. Although the pace of growth of banks also declined in H1 FY2021, it remained higher than HFCs, partly supported by portfolio buyouts.

The credit rating agency has estimated the total housing credit at ₹21.3 lakh crore as on September 30, 2020.

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