Indian Financials - NHB guidelines for HFCs by IDFC Sec

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National Housing Board (regulator for Housing Finance Companies) has instructed HFCs to:

·         Charge the same floating rate of interest to old and new customers on home loans; and

·         Not to levy penalty on pre-closure of floating rate home loans even if pre-payment is made through borrowed funds. But for fixed rate housing loans the pre-payment charge will be waived only if the loan is pre-closed out of borrower’s own sources.

Impact

Regulatory arbitrage between banks & HFCs – not likely to sustain

o        Currently these norms apply to only HFCs and not banks. RBI had earlier suggested but not mandated these terms for banks. However, we expect RBI to also follow suit and introduce similar guidelines for banks to ensure level playing field for banks and HFCs

Could it be end of teaser rate schemes?

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

o        Also, our conversation with the managements reveals that select financiers offer an option to existing customers to re-finance their loans at prevailing lower rates for a fee. Hence, internal balance transfers through this have led to convergence of interest rates on existing loans into a narrow band for such players.

o        So, we expect new home loan rates to rise from the current levels and settle somewhere between the prevailing new and old home loan rates.

o        With the price of a new home loan going up, the growth in new home sales and mortgage portfolios would be impacted negatively in the current high interest rate scenario.

Waiver of pre-payment charges – a surge in re-finance?

o        The prepayment charges form a very small part of financiers’ income (~Rs260m in H1FY12 for HDFC).  However, waiver of these increases 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.

Our view

Await more clarity; efficient players to gain

o        Prima-facie these norms appear to place HFCs in a weaker competitive position vis-à-vis banks, we would wait for further clarity to emerge on modalities of implementation and any similar regulations for banks.

o        Moreover, we believe that HFCs with low expense ratios and better customer service would be able to sustain their market share as also profitability levels.