The ratio of mortgage to gross domestic product (GDP) in India has remained low at 7%, as against 12% for China, 41% for Hong-Kong and at least 80% for most developed countries, thus providing potential for further growth in the housing sector during the coming years.
While housing finance companies (HFCs), which are regulated by National Housing Board (a wholly-owned subsidiary of the Reserve Bank of India, or RBI) were pre-dominantly catering to mortgage needs over the past few years, banks too have started increasing their exposure to real estate, especially home loans.
This is evident from the fact that the market share of HFCs has decreased from approximately 65% in FY01 to around 55% today. Banks, on the other hand, have been constantly increasing their market share, thereby intensifying competition.
The correction in real estate prices in the initial months of the year and low interest rate schemes announced by banks and HFCs have resulted in significant surge in real estate volumes over the past few months. The State Bank of India (SBI) announced a special home loan scheme in February, taking the first step towards reducing housing loan rates. Other public sector banks and private banks followed the market leader (SBI) to ensure their presence in this segment. The housing sector has witnessed significant surge in volumes, especially in the “affordable housing segment”.
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But due to the sluggish credit demand (up 10.1% year-on-year for the fortnight ended 20 November), banks have been diverting their funds towards housing loans. According to RBI figures, the non-food credit growth during April-August has remained muted at 0.8%. On the other hand, lending to the home loan segment during this period increased 2.8%.
Since February, banks have been aggressively pricing interest rates—both fixed and floating—on home loans. Subsidies have also been provided in the form of reduced processing fees and minimal/no penalty on early repayment. SBI’s home loan book has increased by Rs11,700 crore or at 2.5% compounded quarterly growth rate in the last four quarters. With credit demand likely to revive in the coming months, banks are likely to divert their funds to high-yielding assets, thereby reducing their exposure to the housing sector.
HFCs foresee increasing share of banks’ exposure towards the home loan segment as a temporary phenomenon. In our view, banks are likely to face asset-liability mismatch as these loans have a long gestation period. Further, these loans are a zero-sum game in the initial period due to lower interest rates offered. HFCs, on the other hand, typically, raise money that match their requirements and thus minimize their asset-liability mismatch. The current soft interest rate regime has enabled HFCs to borrow at relatively lower rates and, thereby, pass on the benefits to the customers.
While the discounted/special scheme rates are offered to new home loans, existing customers continue to pay higher rate of interest.
The Indian Banks’ Association has planned to introduce a uniform rate for all borrowers. While the move is in the right direction, we need to watch how banks and HFCs adjust their lending portfolios.
Graphics by Yogesh Kumar / Mint