Money & Banking

HFCs seek nod to impose pre-payment fee

Surabhi Mumbai | Updated on July 20, 2021

Many consumers shift to banks offering lower interest rates

With banks offering home loan interest rates at an all-time low, housing finance companies are feeling the pain as many of their customers are opting for balance transfers. The attrition rate for HFCs in terms of customers undertaking balance transfers is between seven per cent and 10 per cent, according to industry players.

Therefore, HFCs are in discussion the Reserve Bank of India as well as the National Housing Bank seeking permission to impose a pre-payment penalty on customers who transfer their loan account.

“Housing finance companies spend time, effort, and money in originating and acquiring customers. Many choose to leave within six months to a year of the loan being disbursed as they are lured away by banks with cheaper interest rates,” said the head of a housing finance company.

“For customers, such a competitive interest rate regime is certainly a good thing and beneficial for them. That is why the regulators have also not taken any action,” he noted.

Lower interest rates

Banks such as Kotak Mahindra Bank and State Bank of India offer home loans at as low as 6.65 per cent and 6.75 per cent, respectively. On the other hand, HFCs collect interest between 7.45 per cent and 10 per cent.

It is difficult for HFCs to offer lower interest rates to existing customers as that would constitute the account to be considered as restructured.

Challenge for HFCs

“This is a bigger challenge for smaller and affordable housing companies as larger HFCs and banks are able to offer lower rates. We take the risk and give loans to first-time buyers who later go for a balance transfer. About 95 per cent of demand for housing is from the economically weaker section and lower income group, which is what affordable housing finance companies cater to,” said Pavan K Gupta, CEO, Muthoot Housing Finance.

HFCs should be allowed to charge a pre-payment penalty in case the customer moves in the first two-and-a-half to three years, Ravi Subramanian, Managing Director and CEO, Shriram Housing Finance, had said in a recent interview to BusinessLine.

He had, however, said the low-interest rates being offered by banks are not much of an issue as not many of HFCs’ target customers are not able to meet the conditions set by banks.

HDFC Chairman Deepak Parekh, too, had highlighted the challenge for HFCs to retain customers amidst low-interest rates being offered by a number of banks as well as increased loan amounts.

“Another niggling point for HFCs is the retention of customers. Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly,” he had said in a letter to shareholders.

Published on July 20, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like