Loan takeover war leaves customers smacking their lips

LOW INTEREST RATES AND EFFICIENT SERVICE ARE WINNING THE DAY WITH WELL-INFORMED LOANEES

Manika Gupta

New Delhi, April 14 : SO you thought takeovers were a function of predatory corporate houses. Well, you thought wrong. For the most dramatic takeovers are taking place today in the housing finance sector, with the usually sedate housing finance companies (HFCs) looking to grabbing the loan liabilities of borrowers seeking better service and a lower interest rate.

The post-budget pitch in the battle for loan accounts has many in the business gnawing at their nails. The reason is that with information at their fingertips, today’s customers are both more educated and less loyal, so many of them are switching their loan accounts from one bank to another that offers better services, a lower rate of interest and higher tax benefits.

This has the HFCs in a twist. With interest rates loosening up, competition is too close for comfort. Loan takeovers provide an easy way to increase business and down the competition at one go. Take PNB Housing Finance, for example. The number of loan account takeovers by the company has jumped 50 per cent since the budget. Since grabbing interest yielding loan accounts was permitted in April 2000, PNB Housing Finance has taken over nearly 30 loan accounts, worth Rs 6 crore, but given up accounts worth Rs 10 crore.

On the other hand, HongKong Bank takes over four to five accounts worth Rs 25-50 lakh every month, mainly from Citibank, ANZ Grindlays and StanChart, due to the interest rate swap.

D Bastia, a direct sales agent at HongKong Bank’s Greater Kailash branch, says, “Loanees switch over to our bank to get a lower rate of interest.” He adds, “HongKong Bank’s interest rate is 13 per cent on a daily reducing balance, which works out to less than 12.75 per cent annually; banks such as StanChart and Citibank still have an interest rate of 14 per cent.”

Loan takeovers were legalised in 2000, and last year saw some action, but nothing like this year since interest rates on housing loans were reduced. The relevant clause says that the benefit will be given only if the property stock is new and delivered after April 1, 1999, and the loan taken after that date. As a result, a person who availed of a housing loan at 15 per cent interest three years ago, can now transfer his loan to another bank that will charge him only 12.5 per cent interest. A borrower can even fend for his 0.5 per cent extra interest rate, which might be reduced by shifting the loan to another financial institution.

R Nambirajan, managing director, PNB Housing Finance, says, “Basically, shifts have taken place from foreign banks to nationalised banks as that is where the interest rate differential is substantial. Even though the MNC banks score on their delivery, no loanee wants to pay such a substantial difference in interest rates.”
But takeovers are also taking place from one nationalised bank to another, even though the difference between the interest rates of the two banks may be marginal. For instance, FIs are giving away their clients to HDFC and vice-versa.

Borrowers are also moving out of some nationalised banks in order to avail of the higher tax benefit. Such shifts have taken place mainly to Citibank, Canfin Homes, LIC Housing Finance and GIC Finance.
The FIs are a worried lot. “Taking over loans from other institutions is creating problems for the HFCs as it amounts to pre-payment for the lending institution. The funding has to be refinanced, but NHB has a problem with pre-payment without a 1 per cent charge per annum on the reducing balance, which actually works out to 5 per cent,” said Mr Nambirajan.

To offset this trend, some banks have resorted to conversion schemes that allow a customer to switch from a higher interest rate to a lower one within the same bank. Like R L Taneja, vice-president of PNB Housing Finance, says, “The effort is to retain our clients at any rate.”