Banks have aggressively cut their home loan rates and once they begin fixing their bad loans, rates will drop further. Incremental business growth too could get slower as banks garner market share
Aparna Iyer | Last Modified: Wed, Mar 22 2017. 08 28 AM IST | LiveMint.com
Housing finance companies (HFCs) have had the best run over the last one year with their valuations soaring, especially after the government’s demonetisation exercise. The fact that in the wake of falling corporate loans, retail-focused lenders and HFCs in particular have the healthiest businesses has contributed a lot to these valuation increases.
Default rates in home loans are much lower than in corporate loans and the lowest among various retail loan segments. Notwithstanding the impact of the currency withdrawal on the real estate sector, home loan repayments haven’t been derailed while all other loans have succumbed to rising defaults. For instance, Housing Development Finance Corp. Ltd’s (HDFC’s) bad loan ratio was 0.81% as of December while that of Dewan Housing Finance Corp. Ltd (DHFL) was 0.95%. Bad loan ratios of banks are massive compared to these, courtesy their corporate loan book.
But the valuation of a business has a lot to do with future earnings and this is where the going will get tougher for HFCs.
Here is a line of caution that investors should focus on. The home loan market is getting extremely crowded, with most banks aggressively expanding their portfolio. The largest home loan lender is still a bank, State Bank of India (SBI), and it has been aggressive in the market for the past five years. SBI’s home loan book has grown at a 16% capital adjusted growth rate during the said period despite the large size, while its market share has remained at 15%.
But SBI is an old player and the new lenders who had jumped on the home loan bandwagon are all banks that were struck by rising corporate bad loans and shrinking credit growth. Bank of India, Bank of Baroda, Axis Bank Ltd, Kotak Mahindra Bank Ltd and others have laid out plans to expand mortgage loans. Further, predominantly corporate lenders, who had reduced their exposure to the home loan market, are now making a second entry.
The ensuing competition will begin to squeeze margins and this has already begun. Banks have aggressively cut their lending rates and once they begin fixing their bad loans, rates will drop further. SBI’s home loan rate has dropped 100 basis points (A basis point is one-hundredth of a percentage point) in the last one year and both SBI and HDFC currently give home loans at 8.5%. HFCs such as DHFL, CanFin Homes Ltd and Repco Home Finance Ltd lend at slightly higher interest rates.
Analysts at Kotak Securities Ltd note that spreads and margins for HFCs will narrow as the decline in their cost of funds too will be limited.
Incremental business growth too could get slower as banks garner market share. Axis Bank’s market share has risen by 60 basis points in the past two years while that of Kotak Mahindra Bank has grown by 50 basis points.
HFCs’ rich valuations are sure worth a second look.
MANJU AB | Fri, 13 Jan 2017-07:05am | Mumbai | DNA
With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning
Aggressive pricing of home loans by banks and higher income disclosures by customers after demonetization may see a shift of home loans from home finance companies (HFCs) to banks. With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning.
However, the HFCs say the market will expand as the income disclosures will go up and the secondary market, which was predominantly cash, will now go through the white economy, enabling banks and bigger HFCs to capture the market.
Keki Mistry, vice-chairman and chief executive officer, HDFC, told DNA Money, “The market size for home loans will expand as income disclosures will be higher and more customers will get bankable. The cost of funding for banks have certainly come down but no one is going to price a home loan based on temporary deposits like the savings deposits, as these savings deposits are now flowing into mutual funds, insurance and other higher yielding investments.”
Religare Securities said in a report that the ability to assess cash income and a high-risk appetite are key growth factors for NBFCs, “Now, some categories of borrowers whose disclosed income has risen after the note ban may become eligible for bank loans.”
Nearly 80% of the people buy homes directly from the primary market that is builders and most of them pay by cheque. The remaining 20% is the secondary market where cash is a predominant mode of payment.
“Now we can have access to that market as well as cash component is likely to be negligible, and hence the average loan size will go up if the entire value of the property is paid in cheque. Besides banks have CRR, SLR and priority sector that add to their cost. But certainly the silver lining is that due higher income disclosures and the so-called unproductive money moving into the white economy will improve prospects both for the primary and secondary markets,” Mistry said.
Analysts say that even HFCs, especially the larger ones, have seen a drop in their funding cost to the extent of 1% over the last six months.
Religare report said, “Direct selling agents have stated that valuers have reduced loan-to-value (LTV) ratios and raised the haircut assumptions on property value. Pre-demonetization, most balance transfers would take place between NBFCs and also from banks to NBFCs, in order to increase the loan amount or provide flexibility in loan repayment. This has come to a grinding halt as property valuations have come off. ”
Gagan Banga, vice chairman & managing director, Indiabulls Housing Finance, told DNA Money, “We deal with fully banked customers based on disclosed and reported income. Being AAA-rated allows us to borrow from the bond markets at very fine rates and that combined with our significantly lower cost income ratio letting us price loans across products including home loans and loan against property (LAP) on par with banks.”
In anticipation of the property prices correction, customers are going to keep away from purchases or take loans against property. The demand for home loans and also LAP is already slowing down. “The margin expansion story enjoyed by HFCs from lower borrowing costs and a richer loan mix is unlikely to be sustained,” the Religare report said.
Rating agency Icra said in a separate report, “Given that around 60% of the borrowings for HFCs are at fixed rates of interest, and the assets are largely on floating rate, it is likely to get impacted more on account of their relatively higher operating cost ratios.”
State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
Mayur Shetty | TNN | 02 November 2015, 8:07 AM IST | ET Realty
MUMBAI: State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
According to RBI guidelines, bank loans are priced above the benchmark rate, which is the ‘base rate’. In the case of HFCs, the benchmark is their prime lending rate. However, HFCs face no restrictions on lending below their prime lending rates. As a result when rates change, banks have less freedom to re-price loans selectively compared to HFCs, which can vary the spreads over or below the benchmark to any extent.
“I don’t think there should be any regulatory arbitrage (between banks and HFCs). Regulatory arbitrage always makes for an uneven-playing field, and in any area that you are operating it is important to have a level-playing field so that the most efficient of them do the best job,” said Bhattacharya.
According to her, the regulator had spoken of the difference between cost of funds for banks and HFCs as the reason for the discrepancy. “The regulator says that they also have to get their resources at higher cost compared to what the banks pay. So there are pros and cons for everyone and, therefore, how do you create equity so that everyone has a level-playing field? It is difficult to opine on this,” she said.
Explaining her earlier demand for more flexibility in home loans, Bhattacharya said that the bank was not seeking introduction of teaser loans. Rather, it was keen on introducing step-up loans where EMIs rise after initial years. “I believe that there is a place for this. When people take a loan, they go right up to the top. But over time, repayment becomes easier as salaries go up and lifestyle changes to adjust to the instalments, and within two or three years the EMI does not hurt as much as it did in the initial years. Therefore, a variable EMI is something that makes repayment easier,” she said.
She added that there are also some borrowers who do not immediately shift into the house and have an additional burden of rental in the initial two-three years. “There are difficulties in the first two-three years, which we feel if there is a step-up EMI, then that definitely addresses stretched budgeting for first-time home loan borrowers,” she said. On a proposal by the National Housing Bank to reintroduce prepayment charges on floating rate loans if loans are prepaid in the first two years, Bhattacharya said, “In case of floating rate loans, The loans are anyway floating downwards. In that case, is there any case for a prepayment penalty? We have not put our mind to it.”
Source : http://goo.gl/AIQdzr
By: Surabhi | New Delhi | December 9, 2014 8:01 am | Financial Express
Prime Minister’s Office has worked out a plan to ensure credit flow of Rs 2.3 lakh crore to home loans that would help build 11.5 lakh such homes.
In a boost to low-cost housing, the Prime Minister’s Office has worked out a plan to ensure credit flow of Rs 2.3 lakh crore to home loans that would help build 11.5 lakh such homes.
According to the proposal worked out by the PMO, the Employees’ Provident Fund Organisation (EPFO) and insurance firms will deploy 15 per cent of their corpus towards home loans of up to Rs 25 lakh for low-cost housing.
Accordingly, the Central Board of Trustees of the EPFO is set to consider a proposal to deploy 15 per cent of its Rs 6.5 lakh crore kitty in the bonds of housing finance companies engaged in low-cost housing as well as amend the scheme to allow premature withdrawals by subscribers before the minimum service period of five years for servicing home loans.
“The proposal from the PMO has worked out that this decision shall generate a credit flow of Rs 70,000 crore towards home loan for low-cost housing, which in turn will create Rs 3.5 lakh additional low- cost homes,” said the agenda for the CBT meeting on December 19. The PMO has further said that insurance companies and the EPFO should be directed to invest any shortfall in investments into the Rural Infrastructure Development Fund (RIDF) NABARD bonds in line with the priority sector limit shortfall guidelines for banks.
The move comes at a time when the Centre is working to promote affordable housing as well as develop 100 smart cities. Contending that housing loans given by housing finance companies are relatively low risk credits, the EPFO has accordingly suggested that its investment norms should be relaxed to allow more HFCs to become eligible.
Current investment norms allow the EPFO to invest in dual AAA rated bonds of companies making only seven HFCs eligible. These include HUDCO, HDFC, LIC Housing Finance, National Housing Bank, PNB Housing Finance, Dewan, Housing Finance Ltd and IndiaBulls Housing to which the EPFO has invested Rs 8,067.25 crore.
The EPFO has suggested that in order to invest the balance of Rs 55,618 crore in such companies, it should also invest in AA rated+ bonds of HFCs in which the government or any PSU or dual AAA rated private company has more than 25 per cent stake. Further, the current limit under which it can invest up to 40 per cent of the company’s networth should be increased to up to 60 per cent.
These relaxations will make more companies eligible including GIC Housing, Canara Home Finance, ICICI Home Finance, Gruh Finance and Sundram Paribas allowing additional investments of Rs 1,044 crore by the EPFO.
However, experts warn that home loans are not a low risk proposition and such decisions must be based on risk and returns. “The larger stakeholder should be involved. Investment decisions must be restricted to investment needs and not for imperatives for larger society,” said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd, an investment and legal consulting firm in retirement benefits.
Official data reveals that non-performing assets in the housing loan segment of public sector banks have shot up by over Rs 1,000 crore to around Rs 6,200 crore during the first six months of calendar 2014.
Source : http://goo.gl/dRw8yc