Is The Home Loan Market Getting Nasty

Updated: Nov 17 2003, 05:30am hrs
Home loan customers never had it so good. But the home finance business is fast turning into a war zone. Big players like the State Bank of India (SBI), ICICI Bank, and Housing Development Finance Corporation (HDFC) are going all out for the kill by throwing in a host of discounts, free insurance and other goodies. Over the last six months, these players have cut home-loan rates by 100-150 basis points. Though expected, the latest move by ICICI Bank to slash rates by 50-75 bps to become the cheapest home financier after the status quo adopted by the Reserve Bank of India (RBI) in its Monetary and Credit Policy for the second half of 2003-04 has stunned both SBI and HDFC, which more or less move together with a small difference in their respective rates.

A despairing senior official of SBI was left wondering how the second largest commercial bank would manage its asset-liability with such a low spread. We are not prepared to do any business at a spread of one per cent. It does not happen anywhere in the world, he quipped. In fact, SBI which earlier used to lead the rate cut is yet to respond to ICICI Banks latest move.

It might also be recalled that sometime back, none other than HDFC chairman, Deepak Parekh, had openly warned about the unhealthy and dangerous competition creeping into the local home finance segment. Frauds are possible with this kind of competition and players have to be careful in this regard, Mr Parekh had cautioned.

I expect short-term interest rates to fall further while in the long term, they will remain at current levels, says ICICI Banks executive director, Kalpana Morparia. Explaining that the rate cut is the outcome of cost-benefit analysis, she says that if the banks funding costs come down due to changing market developments caused by various measures by the RBI, the bank will be in a position to revise rates.

The net interest income will continue to contribute to net profit for the whole year for the bank, as we are saving almost 4-5 per cent by retiring high cost debt, says Ms Morparia.

Retail assets of ICICI Bank increased by 110 per cent to Rs 25,205 crore (Rs 12,021 crore) and constituted 47 per cent of the total advances at the end of the first half of 2003-04. The banks net customer assets at end-September 2003 were at about Rs 64,500 crore.

During the first half, the total sell-down by securitisation assets was about Rs 5,300 crore, out of which housing loans accounted for nearly Rs 1,000 crore. The banks deposits increased 18 per cent to Rs 56,880 crore over Rs 48,169 crore at March 2003.The average cost of deposits in Q2 stood at 5.6 per cent. In the west fifty per cent of all advances is towards mortgage finance, she says.

The SBI too is not far behind. Its new found aggression significantly shows in the retail loan segment, with a growth of Rs 2,992 crore in first half of 2003-04 (Rs 2,567 crore). In the thrust area of housing loans, in the first half, there was growth of Rs 1,703 crore (Rs 1,655 crore).

The total home loan exposure of the bank as on end-September 2003 stood at Rs 13,938 crore against Rs 12,174 crore as on end-March 2003. The share of this portfolio in total non-food advances improved to 10.53 per cent as on end-September 2003 from 9.20 per cent as of end-March 2003. The cost of deposits of reduced to 5.76 per cent in the first half of 2003-04 (6.62 per cent). Indicating a flexible stand on the housing front, SBI chairman, AK Purwar, said that local interest rates will have a softer bias as globally the rates are low; that India cannot remain isolated on the interest rate scenario.

HDFC with a slightly different strategy, which involves pricing a tad higher than other banks has still been able to maintain its fair share in the booming housing sector.

Says Mr Parekh: The institution has achieved good growth despite having higher interest rate than others. We are happy to have growth of 25-30 per cent which we have been maintaining for sometime. We would like to maintain a spread of two per cent for our business, adding that HDFC has its own advantages over the other institutions in the sector. We can deliver many more things in the segment including rendering advisory services to a customer. This is something more than what a banks branch manager can do.

It is estimated that by 2010 and with the current rate of growth in population, India would require an average of 2.5 million to 3 million additional constructions annually. Presently only a meagre 20 per cent of new housing units are financed through 29 players including specialised housing finance companies. This clearly shows that there is remarkable potential to augment the figure. A simultaneous boost to housing finance can push up the economic scenario on a large scale as it has a multiplier effect. Furthermore, as shortage of dwelling units has grown alarmingly, the segment is moving over to a capital surplus from a grossly capital deficient stage. This is due to high liquidity in the system and slow credit offtake from the corporate sector.

Experts believe that intervention through institutional credit can be made more effective by adoption of different approaches to cater to the needs of different income groups. Above average-income households could be well served by players raising resources through the open market and delivering credit with the minimum of prudential regulations.

For households below the poverty line, institutional credit will have to take into account employment and poverty alleviation programmes having an element of subsidy. It is the middle-group which constitutes nearly half the total households that need to be taken care of. With the Centres timely intervention, housing finance on its own has become a major industry within a short period of time.

The National Housing Bank (NHB) has been encouraging housing finance companies (HFC) via its refinance schemes. It recently also revised borrowing powers, risk weights and capital adequacy norms which have added muscle to HFCs. However, much more needs to be done to make players competitive.

In this regard, multilateral agencies like the Asian Development Bank (ADB) and International Finance Corporation (IFC) have also begun examining options of entering the local housing finance segment. Sources said that ADB has already begun discussions with domestic HFCs.

The support offered by these kind of multilateral players by way of cheap funding to the housing sector will be more in the nature of refinance, back-stop facilities or in the form of credit lines. Another source of long-term finance is mortgage securitisation which is still to be tapped to its full potential.

Efforts by ICICI Bank and NHB to pilot mortgaged-backed securities has served the purpose of developing market awareness about the product and to sensitise regulatory authorities about the need to create an enabling environment for high-volume deals.

The Centre too has given thrust to development of the sector, both from the demand and supply side by providing fiscal concessions to vendors of finance and borrowers. The effect of the these measures have become evident since the rate of growth of housing finance business.

McKinsey Indias partner Leo Puri projects a threefold rise in revenue from personal banking finance sector to $20 billion by 2010 from $7 billion, the domestic housing finance system which will have major share in this growth, is still evolving. And in this context, it becomes necessary that it exhibits a greater amount of stability in terms of resource development, policy development and institution building.