With the Reserve Bank of India mandating banks to link fresh retail and SME loans from October 1 to an external benchmark, the pressure is now on housing finance companies and non-banking finance companies to match the rates.
Most HFCs point out that linking home loan rates to an external benchmark like the repo rate may not be feasible for them, as they raise funds from a number of sources. But, the question is then how to get customers who may choose to go to banks for a home loan.
The country’s largest mortgage lender Housing Development and Finance Corporation is considering whether linking rates to an external benchmark is possible. “We may discuss the issue in our next asset liability committee (ALCO) meeting but whether it is done or not is still to be decided,” said HDFC vice chairman Keki Mistry told BusinessLine .
Until now, RBI has not mandated external benchmark linking of loans for HFCs and NBFCs and many firms are awaiting more clarity from the regulator.
“HFCs do no not have that window of repo, then linking with that is not correct. Also the liability of HFCs, which include term loans, NCDs or capital market borrowings do not get changed immediately like repo rate. So it does not look like a possible choice to benchmark with repo,” said Pavan K Gupta, CEO, Muthoot Housing Finance, adding that HFCs they will differentiate themselves from banks by being more customer service oriented.
“Many HFCs wait to see how the new system works for banks before taking a call on what to do next. But for many borrowers, HFCs and NBFCs are the preferred choice for taking loans due to their wide distribution reach and less hassles,” noted an official working with another HFC, pointing out that when interest rates start to rise, the external benchmark linked loans will begin to pinch borrowers.
An increase in the repo rate will lead to an immediate increase in the rate of interest as against a quarterly rate revision cycle associated with a non-Repo Rate linked home loan.
A recent report by ICICI Securities had said that HFCs will be more impacted by the external benchmarking of loans by banks. “We expect HFCs to match the bank under competitive pressure. Their costs will not be declining in line with loan rates and thereby margins can be in pressure for both LIC housing finance (retail loans-93 per cent) and HDFC (71 per cent),” it had noted.