Housing Finance Companies Facing Increased Pressure To Cut Lending Rates
After state owned banks have reduced interest rates on mortgages of up to Rs 2,000,000 or US$ 42,000, Housing Finance Companies (HFC’s) will face increasing pressure to lower their interest rate charges in order to stay competitive.
HFC’s do not obtain funding from depositors, instead obtaining it from the banking sector or the bond markets. Many are complaining that their cost of funding is showing no signs of easing since most banks are still charging double digit interest rates, some even as high as 13 per cent. This means that in many cases HFC’s funding rate exceeds their average lending rate.
LIC Housing Finance Company (LICFC) and Housing Development Finance Corporation (HDFC), which together command over 70 per cent of HFCs’ market share, charge around 11.5 per cent, whilst Dewan Housing Finance Company charges between 12 and 14 per cent.
The weighted average cost of working funds for HFCs is around 300 basis points higher compared to the public sector banks. current HFC lending rates are 50-100 basis points higher than the State owned banks. After the announcement of a reduction in interest rates, the spread is to increase by a further 225 basis points to 350 basis points (for loans up to Rs 20 lakh), making HFC’s uncompetitive.
“We need to figure out ways for cheaper finance as there is no option left for us but to reduce interest rates to remain competitive and protect our market share,” an HFC CEO, who refused to be named, told the Business Standard.
According to industry estimates, HFCs constitute over 40 per cent of the Rs 120,000 crore housing finance market and share of these companies with respect to the incremental market share is likely to fall to 15 per cent at the end of 2008-09 from around 25 per cent during 2007-08.
With the proposed cheaper window from National Housing Bank (NHB), HFCs are expected to come up with a counter strategy to protect their market share.
“We are waiting for details of the package to understand its impact. We will decide on our counter strategy in a couple of days. However, apart from the proposed NHB fund, we need to explore other alternative avenues of cheaper finance as well,” said LIC Housing Finance Director and CEO R Nair.
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