Money & Banking

Housing finance sector is now an oligopoly: Investec Capital

Our Bureau Mumbai | Updated on October 30, 2019

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India’s housing finance sector has transformed from a perfect competition to an oligopoly in a matter of 15 months with the IL&FS crisis and the Reserve Bank of India linking home loans (HL) to an external benchmark rate (EBR), according to report by Investec Capital Services (India) Private Ltd.

An oligopolistic market structure is one where a limited number of firms dominate the market. Investec Capital, which is registered with SEBI as a merchant banker, observed that the oligopolistic market is centered on State Bank of India (SBI), HDFC, and LIC Housing Finance (LICHF).

The IL&FS crisis impacted the competitive position of housing finance companies (HFCs) as funding costs soared, the company said in a report, adding that the RBI’s decision to link banks’ HL to an EBR increases interest rate risk, given that the liabilities are fixed rate.

“Private banks increased HL rates rationally while public sector banks cut rates or kept them stable. On the other hand, HDFC and LICHF saw an improvement in competitive positioning as they were now able to raise money at competitive rates. “These dynamics resulted in an oligopolistic market centred on SBI, HDFC, and LICHF. We expect these conditions to continue over medium term,” Investec Capital said in a research report.

Analysts Nidhesh Jain and Utsav Gogirwar observed that the spread between loan interest rate offered by private banks over SBI is the highest in the last 10 years. This, they believe, is an unintended consequence of the RBI’s decision to link HL to an EBR, and has increased interest rate risk on banks’ balance sheet.

“As a result, private banks are asking for a higher risk spread, while SBI offers lower rates now than under the MCLR regime.

“On a time series basis, the interest rate spread of ICICI Bank HL over SBI HL has increased to three-year highs of 60 basis points. However, in the case of HDFC over SBI, the spread has not changed materially versus history,” the analysts said.

Published on October 30, 2019

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