Housing finance companies score over banks in a falling rate scenario

A falling interest rate scenario is considered good from a consumer’s point of view. Analysts expect that sliding interest rates would be good for the housing and automobile sectors. The general perception is that banks with their access to low-cost deposits are better placed than non-banking finance companies to offer attractive rates. However, a comparison of the interest rates, especially in the housing sector, shows that there is little difference between offerings of the two.

Many home buyers favour taking loans from housing finance companies (HFCs) as compared to banks. What goes in favour of HFCs is that they include stamp duty and registration costs while calculating the total costs of the property as compared to only basic property rates for banks.

With these mandatory costs rising and state governments keen to extract the most from property deals, consumers prefer to take loans from HFCs. Paper work is also faster with HFCs as they concentrate only on the housing sector as compared to a bank that lends to various assets.

But with interest rates falling, banks will look to lend more to the housing sector since it is considered one of the safest assets. This way, banks will also see to it that their rising deposits find an outlet.

For HFCs the main sources of fund are borrowings and deposits. Since HFCs have to vie for deposits by offering competitive rates, their costs of such deposits are high which leaves little spread for the HFCs.

With various money-raising schemes opening up now, HFCs are now able to directly compete with banks, at least in volume terms if not on profitability. Bigger HFCs like HDFC are using various avenues like Masala Bonds to raise low-cost funds.

More importantly, these companies are using the newly developed bond market to source their borrowings. Falling interest rates have an immediate impact on the bond market, while banks generally shy away from reducing rates immediately. The drawback is that only HFCs with higher ratings can take advantage of this fall.

Those HFCs with a lower rating generally prefer to lend either in the Tier 2-3 cities or lend to slightly riskier consumers at higher rates. They also prefer to go in for higher yielding ‘loan against property’ or ‘developer loans’ types of product.

Government’s focus on low-cost housing is expected to increase lending for the housing sector. The government has announced an interest subvention scheme ranging between 3-4 percent. However, here the banks are expected to score over HFCs as the RBI has allowed banks to issue infrastructure bonds and permitted these loans to be eligible for priority sector lending (PSL). Since banks are allowed concessions for meeting the PSL norm, their cost of lending goes down further thus emboldening them to lend further.

However, a bank’s risk-averse nature has generally seen HFCs taking away market share from banks. This time, too, HFCs, because of their focus, might come out as winners, notwithstanding a drop in interest rates.

-Shishir Asthana


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