It is a very strange phenomenon in the Indian housing loan market. Long standing customers with clean repayment credentials and good track record are forced to pay higher interest rates than new borrowers.

And the extent of such difference could be substantial, a Review on Housing Finance Companies and Indian Mortgage Finance Market by ICRA said.

Unlike the developed markets where borrowers opt for floating loan based on an accepted international benchmark like the London Interbank Offer Rate or national Government Security rate, the Indian benchmark rates are different. Indian borrowers are forced to go by the lender's base rate or prime lending rate, which are often inflexible in a scenario of declining interest rates.

Instead lenders take new borrowers at thin interest spreads but subsequently raise rates steeply in order to improve their spreads. While the RBI has clamped down on teaser loans, most housing loans in India continue to have a teaser element in them.

Even as banks continue to hog the housing loan market, Housing Finance Companies still account for 31 per cent of the loans. HFC loans have been growing far faster than bank housing loans since 2007-08 and still continue to outpace banks by a wide margin into 2010-11.

Going by the Indian paradigm, the housing loan market has been sequestered by 20 centres/regions, which account for 57 per cent of the disbursals. They accounted for 63 per cent five years ago.

The housing loan market is also dominated by a few top players – SBI and its associates, HDFC Group and ICICI Bank – which together account for 48 per cent of the total market. But newer and smaller players are beginning to make a dent.

On the NPA front also, HFCs seem to be performing better than banks. The spurt in interest rates translated into extension of the repayment tenure by most HFCs while banks resorted to hikes in EMI, the report said.

This along with significant growth in disbursals by HFCs during the last three years ensured that housing NPAs as a percentage of housing loan disbursals did not stay at elevated levels, contrary to banks.

cj@thehindu.co.in