Relief for home loan borrowers

The National Housing Bank has asked housing finance companies to refrain from levy of penalty on preclosure of floating rate loans.

For those millions of home loan borrowers who were sulking at their decision to go for floating rate of interest, and who found their own interest rates being regularly reset even as new borrowers were being assiduously besought with lower rates, the order from the National Housing Bank that regulates Housing Finance Companies (HFCs) on treating both sets of borrowers equally should have come as a surprise.

The National Housing Bank, in a major relief to home loan customers, also asked the HFCs to refrain from levy of penalty on preclosure of floating rate loans, even if this was made from borrowed money (generally a euphemism for fresh loans at lower interest rates from a rival lender).

While the decisions have been welcomed by the real estate industry and the borrowers, the HFCs aren't really pleased.

In an interview to Business Line, Mr Srinivas Acharya, Managing Director, Sundaram BNP Paribas Home Finance Ltd, Chennai, expressed the fear that ‘home loans would be operated as demand loans with frequent shifts of home loans'. He argued that ‘there is a certain degree of unfairness' in that, while there are restrictions on charging a foreclosure premium on the asset side for HFCs; these will continue to pay premiums on foreclosures on the liability side.

FORECLOSURES

Currently, the HFCs see foreclosures to the extent of 10 per cent of the portfolio in a year. Already, foreclosure of home loans from own savings is exempted from penalty. Therefore, he didn't see much additional impact beyond, say, 0.075 per cent of the portfolio. While he didn't see this as a major source of income, this penalty always served as a ‘deterrent against poaching of customers'. As regards interest rate equalisation between old and new customers, he said this wasn't a major problem and will get settled with time. The real issue was there was no similar condition on lenders to HFCs!

On being asked if he feared there would be a shift from HFCs to banks because of this order since the National Housing Bank order would apply only to HFCs, Mr Acharya didn't view this ‘as a threat'. HFCs primarily thrive on their quick ‘turn-around time' and better understanding of the business and customer service. Some movement may be there, but that would only be an immediate reaction in the short term, he felt.

As to HFCs raising the interest rates for new borrowers so as to mitigate the impact of the order, he said the ‘interest rates would be guided more by ‘demand-supply' factor and the impact wouldn't be serious for HFCs who have borrowed on variable rate terms.

He felt that while there may be some rush for refinancing of higher cost home loans with cheaper loans, this would settle down. More than the bigger players in the industry, the smaller players are niche players and therefore won't be affected. As a result, his own company may not be impacted by more than Rs 3-4 crore this year. This wasn't a major component of its overall income and he said that ‘a HFC should thrive on continuity of a good customer rather than short-term gain from foreclosure premiums!'

Mr Acharya argued that this was ‘more a populist kind of measure', as home loans attract a lot of attention and touch the retail end of customers. Even the Competition Commission of India (CCI) had upheld the appropriateness of foreclosure premium. While conceding that there might be some fringe players charging premiums at exorbitant rates, that really may not be the case in his own company. Moreover such players charging premium at exorbitant rates could be controlled.

PREMIUM

He felt that there could ‘be a mandated rate of premium' rather than removing it altogether. Removal of foreclosure premium, if at all, should have been done across the financial sector, both for lending and borrowing, and not just for HFCs alone.

Mr. Acharya also felt it would be far more prudent ‘to chase a known customer with proven repayment record rather than go after a new home loan customer with all the uncertainties!', he added.

In an impact analysis of National Housing Bank's decision, IDFC Securities said that the regulatory arbitrage between banks & HFCs wasn't ‘likely to sustain'. At present, these norms apply only to HFCs, and not banks. RBI had earlier suggested, but not mandated, these terms for banks. However, it expected RBI also to follow suit.

Referring to the practice of financiers offering a lower rate for new home loans (for old borrowers) to attract business, it felt that the financiers would have to increase the interest rates for new loans more (by 100-150 bp). However, they could establish a credit profile of customers to mitigate the impact, offering some flexibility in pricing.

IDFC Securities expected new home loan rates to rise from the current levels and settle somewhere between the prevailing new and old home loan rates. With the cost of a new home loan rising, the growth in new home sales and mortgage portfolios would suffer.

Waiver of prepayment charges constitutes a very small part of financiers' income. But waiver increased borrowers' ability to refinance their existing loans. This could place players with a stronger liability franchise in an advantageous position vis-à-vis less competitive players, it concluded.

Mr. S. S. Asokan, Executive Director, Shriram Properties Ltd, Bangalore, said that at a time of rising interest rates, this will greatly help the borrowers and facilitate greater housing loan disbursals by the HFCs.