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NHB follows RBI, tightens lending norms. NHB has revised guidelines on provisions,
risk weights and LTV ratio for housing finance companies (HFCs) following RBI’s recent
move to amend the same for banks. We find negligible direct impact for HDFC due to
the cushion of excess provisions; LICHF’s significant 5-year fixed rate portfolio will imply
6% downside risk to FY2011E PBT in case these loans are qualified as ‘teaser loans’. We
believe that a tighter regulatory regime will increase upward pressure on home loan
rates even as most companies have recently raised interest rates.
NHB follows RBI in tightening regulations
NHB has revised guidelines for housing finance companies following RBI’s move to revise the same
in the recent credit policy.
` Loan-to-value ratio capped at 80%, no limit earlier. We believe that the cap on loan to
value (LTV) will impact the demand for home loans and reduce speculation, especially in large
cities. A lower LTV will imply that borrower’s equity will increase by as much as 50-100% more
for buying a property thereby reducing speculative demand. Notably, neither RBI nor NHB had
prescribed a cap on LTV in the past.
` Higher provisions and risk weights. In the backdrop of higher real estate prices and rising
interest rate regime, the regulators seem to be uncomfortable with teaser (dual-rate) product
and large-ticket lending. NHB has followed RBI in raising risk weights on high-ticket loans—now
loans above Rs7.5 mn will carry 125% risk weight irrespective of the LTV ratio. The risk weights
were earlier 75-100% (linked to LTV). We believe that a rise in risk weight will likely push up
home loan rates by about 1-1.25%.
` Standard asset provisioning on teaser loans. In case of teaser (dual-rate) home loans, NHB
has increased standard asset provisions to 2%. We would like to highlight that retail home
loans offered by housing finance companies do not carry standard asset provisions; in case of
banks, retail home loans have a risk weight of 0.4%.
` Temporary relaxation for provisions for builder loans. NHB currently requires housing
finance companies to carry a provision of 0.4% on standard non-retail (builder) loans. This will
now be relaxed to 0.2% till March 2011E. However, HFCs will need to reinstate provisioning
levels at 0.4% from September 2011E. Notably, the provisioning on non-retail loans remains
lower for HFCs as compared to banks (1% required for banks on commercial real estate loans).
` Direct impact likely on LICHF. According to rough estimates, HDFC and LICHF will need
provisions of Rs3.8 bn and Rs2 bn on their teaser loan book. As highlighted in the exhibit,
LICHF’s earnings may decline by about 5-6% on this account; excess provisions at HDFC will
likely absorb the provision requirements on teaser loans. In this calculation, we have assumed
that Rs100 bn of LICHF’s portfolio will be classified as ‘teaser’ loans though management has
highlight that its five-year fixed rate loans (about Rs50 bn) may be excluded from this
classification; in this case the impact will be negligible.
All large players except SBI have recently raised home loan rates
` In the first week of December 2010, HDFC, ICICI Bank and LICHF raised lending rates by
about 50-75 bps.
` HDFC now offers home loan rates to new customers from 9.5% for loans up to Rs3 mn,
9.75% for loans between Rs3 mn and Rs7.5 mn, and 10% for loans above Rs7.5 mn.
` HDFC and LICHF also raised their benchmark rate (applicable for existing customers) by
50-75 bps on the back of a 50 bps hike effected in September 2010.
` HDFC and ICICI Bank have withdrawn their dual-rate (teaser) home loan schemes.
` SBI will review the rates in January 2011.
Rising bulk borrowing rates put pressure on borrowings cost
The current liquidity squeeze in the system has put significant pressure on bulk borrowing
rates, primarily in the shorter end on the yield curve—interest rates below one year are up
by about 4% from April 2010 levels. Our economist expects liquidity to ease out though
remain negative at a deficit of Rs0.5 tn by March 2011E (better than the current level of
deficit of Rs1.5 tn). In this context, we believe that bulk borrowers will likely face margin
pressure or may have to raise lending rates which has the risk of pricing them out. Demand
in housing remains strong; tough affordability index has moved up sharply. As such, banks
with high CASA—HDFC Bank, PNB, BoB and Union Bank—are better-placed in the current
environment.
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