With the RBI mandating banks to link fresh retail and SME loans to an external benchmark from October 1, the pressure is now on housing finance companies (HFCs) and non-banking finance companies (NBFCs) to match the rates offered by banks.

Most HFCs point out that linking home loan rates to an external benchmark such as the repo rate may not be feasible for them as they raise funds from a number of sources. The question then is how to draw customers, who may otherwise choose to go to banks for home loans.

The country’s largest mortgage lender, Housing Development Finance Corporation (HDFC), is looking at the feasibility of linking rates to an external benchmark. “We may discuss the issue in our next Asset Liability Committee (ALCO) meeting, but whether it is done or not is still to be decided,” HDFC Vice-Chairman Keki Mistry told BusinessLine .

Until now, RBI has not mandated external benchmark linking of loans for HFCs and NBFCs, and many firms are awaiting more clarity.

“HFCs do not have that window of repo; then linking with that is not correct. Also, the liabilities of HFCs, which include term loans, NCDs and capital market borrowings, do not change immediately like the repo rate. So it does not look like a possible choice to benchmark with the repo,” said Pavan K Gupta, CEO, Muthoot Housing Finance. HFCs will, instead, differentiate themselves from banks by being more customer service oriented, he added.

“Many HFCs are waiting to see how the new system works for banks before taking a call on what to do next. But, for many borrowers, HFCs and NBFCs are the preferred choice for taking loans due to their wide distribution reach and less hassles,” noted an official working with another HFC, pointing out that when interest rates start to rise, the external benchmark-linked loans will begin to pinch borrowers. An increase in the repo rate will lead to an immediate increase in the rate of interest, as against a quarterly rate revision cycle associated with a non-repo rate-linked home loan.

Competitive pressure

A recent report by ICICI Securities said HFCs will be impacted more by the external benchmarking of loans by banks. “We expect HFCs to match banks under competitive pressure. Their costs will not be declining in line with loan rates and thereby margins can be under pressure for both LIC Housing Finance (retail loans of 93 per cent) and HDFC (71 per cent),” it had noted.

According to CARE Ratings, any volatility in interest rates linked to an external benchmark will primarily impact the housing loan segment (over 13 per cent of bank credit), which has variable interest rates, as vehicle or any other asset financing generally has a fixed interest rate.

“Further, given the declining interest rate scenario and competitive pressures, HFCs are likely to face volatility in their customer bases and cede a portion of their market share to banks,” it had noted.

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