The RBI has mandated banks to link their lending rates to an external benchmark like the repo rate to ensure faster transmission of policy rate changes to customers.
Nilanjana Chakraborty asks experts how partial implementation will impact these companies and their customers, and whether it will lead to new borrowers naturally gravitating towards banks now
The Reserve Bank of India (RBI) has mandated banks to link their lending rates to an external benchmark like the repo rate. This is to ensure faster transmission of policy rate changes to customers. But housing finance companies (HFCs) and non-banking financial companies (NBFCs) have not been brought under the ambit of this regulation, even though they have a big share in the lending market. Nilanjana Chakraborty asks experts how such partial implementation will impact these companies and their customers, and whether it will lead to new borrowers naturally gravitating towards banks now.
Sanjay Chaturvedi, CEO, Shubham Housing Development Finance
Niche NBFC products will always attract customers
The question of whether borrowers will choose bank loans over those offered by HFCs and NBFCs now that the former will have benchmark-linked rates is based on the assumption that a home loan is a commodity, and whoever has the lowest rates will attract the customer. But in the real market, people are willing to pay more for a product that is differentiated.
A lot of NBFCs and HFCs came into being because they serve a niche that banks were not interested in because the niche was too small or the cost of credit delivery of banks would not be appropriate to service them. So, I think there will always be niche markets that can be serviced by different companies and not necessarily by the largest and the cheapest product.
Another factor is that most NBFCs and HFCs are not deposit-taking entities. Banks, on the other hand, are and raise funds from the public. So, regulation and governance is slightly different for the two. Also, given that the repo window is not open to NBFCs and HFCs, the question of them linking rates to repo does not arise at all.
Mukesh Jain, Real estate and banking law expert, and founder, Mukesh Jain & Associates
Small change in EMI might not make a huge difference
RBI’s mandate is aimed at passing on the cuts in repo rates to customers. The reason the regulator intervened is that the banks were not linking their base rates to repo rate changes. For existing consumer loans, they had completely different criteria as they argued that existing fixed deposits would continue at the existing rates till they matured, so existing loan rates should do the same.
But unlike banks, HFCs and NBFCs can’t raise funds from the public. In order to achieve asset liability compatibility, their tenure of borrowing has to match their lending tenure. What is applicable to banks can’t apply to HFCs and NBFCs as the source and structure of funding is different.
As to whether it will deter borrowers, a small difference in EMI might not make a difference. Speed and accessibility of processing is equally important. HFCs and NBFCs provide doorstep service, whereas public sector banks make you go through an arduous process to get a loan issued. But, theoretically, there will be a difference. If you are a penny pincher, you may want to choose banks over NBFCs and HFCs.
Gaurav Gupta, Founder and chief executive officer, MyLoanCare
HFCs, NBFCs may look for ways to retain customers
It would be natural for new borrowers to prefer lenders offering home loans linked to an external benchmark. However, a large part of the home loan market, especially at the lower end, is better serviced by HFCs. There is a possibility that unless HFCs also migrate to an external benchmark, some existing borrowers will try to shift their loans to banks.
If HFCs and NBFCs were to shift to an external benchmark (either voluntarily or mandatorily), there is likely to be pressure on their net interest margins. This possibly explains why the regulator has not extended the new external benchmark regime to HFCs and NBFCs.
However, HFCs will find it tough to compete against banks except in cases where the customer is buying a property that banks are unable to fund or the customer is looking for a higher loan amount that the bank is unable to offer. This fear of existing borrowers opting out and new borrowers preferring banks over them will perhaps force HFCs and NBFCs to look for ways to retain and attract customers, even if it means taking a slight loss on their margins.
Adhil Shetty, Chief executive officer, BankBazaar
Benefits NBFCs already offer should not be compromised
Loans from NBFCs and HFCs are linked to the prime lending rate (PLR). While banks are governed by RBI, NBFCs are governed by the Companies Act. NBFCs are, therefore, free to set the PLR as per their business requirements. This allows NBFCs greater freedom in setting their interest rates.
While this can make the loan more expensive, it suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. Moreover, NBFCs have more relaxed policies towards customers with low credit scores, though they offer loans with high interest rates. While both NBFCs and banks are not allowed to fund stamp duty and registration costs, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount.
Overall, a more responsive interest rate system means the customers will get to see the financial trends reflecting in their loan accounts much faster. However, this needs to be done without compromising the benefits that NBFCs already bring to the table.