KOLKATA: Although the Reserve Bank of India is pushing lenders to make loans cheaper, a huge number of home loan applicants, who borrowed money from smaller housing finance companies, are yet to get the benefit of softer monetary policy.
Smaller lenders are holding on to their rates because they said their cost of borrowing has not dipped much in the last six months, as RBI's 75 bps repo rate cut since January did not transmit into the system fully. "We are waiting for all banks to reduce the base rates," said Edelweiss retail finance chief executive officer Anil Kothuri. "Banks are the primary conduit of monetary transmission."
Some banks led by State Bank of India lowered the base rate by 15-30 basis points since April but there are many which are yet to make loans cheaper. Small housing finance companies (HFC) typically borrow one-third of their funding from banks. Therefore, a reduction of 15-30 bps in banks' base rate reduces HFCs' borrowing cost by just about 5-10 bps if every other cost remains equal, explained a senior official with a medium-sized company.
About 30-40% of funds come by way of refinance from National Housing Bank and the balance they raise from the short-term money market.
"Unless all banks reduce their base rates and NHB lowers prime lending rates, we can't make any meaningful reduction in our lending rates for existing customers," DHFL Vysya Housing Finance managing director R Nambirajan said. A few housing financiers reduced home loan rates only for fresh loan takers.
NHB's refinance rate depends on the internal credit rating assigned by it to any HFC and on the repayment period. It changes the rates periodically depending on the credit profile of the company.
Companies like DHFL Vysya Housing or Edelweiss said they would have to reduce rates soon to compete in the market. The midsized GIC Housing Finance, too, is expected to reduce rates soon. "We will change lending in line with the movement in the market, especially banks' home loan rates," said Edelweiss' Kothuri.
The leader in the specialised housing finance market, the Housing Development Finance Corporation, and Dewan Housing have lowered lending rates, following SBI and ICICI Bank's decision to cut base rates.
However, there are many small lenders who are not thinking of reducing their rates immediately. Small companies working in the niche market segment do not directly compete with banks and, therefore, they don't fear losing customers due to lending rate differences.
HFCs also borrow from short term money market and borrowing cost from this source remained almost static since December last year. Companies raised short-term commercial papers at 8-11.9% rate in May while the cost of borrowing in CP market was 8-11.6% in December last. Cost of raising bonds also remained flat in the last six months.