HFCs under pressure to reduce interest rate on home loans

The housing companies (HFCs) will be coming under pressure to reduce the interest rates on home loans as the public sector banks have taken a final decision on this.

However HFCs are complaining that the cost of funds is showing no signs of easing because banks are still charging around 13 per cent, which is higher than their average lending rate.

For example, LIC Housing Finance Company (LICFC) and Housing Development Finance Corporation (HDFC), which leads by over 70 per cent of HFCs’ market share is charging around 11.5 per cent, while Dewan Housing Finance Company is charging between 12 and 14 per cent to customers.

Whereas the weighted average cost of working funds for HFCs set around 300 basis points higher as compared to public sector banks. After this new package HFCs’ lending rates — which is higher by 50-100 basis points as compared to public sector banks — are believed to move up further by 225 basis points to 350 basis points (for loans up to Rs 20 lakh).

“We need to figure out ways for cheaper finance as there is no option left for us but to reduce interest rates to remain competitive and protect our market share,” said an HFC CEO, who refused to be named.

It is also believed that the with the proposed cheaper window from National Housing Bank (NHB), HFCs are expected to come up with a counter strategy to protect their market share.

“We are waiting for details of the package to understand its impact. We will decide on our counter strategy in a couple of days. However, apart from the proposed NHB fund, we need to explore other alternative avenues of cheaper finance as well,” said LIC Housing Finance Director and CEO R R Nair.

According to industry approximation HFCs comprise over 40 per cent of the Rs 120,000 crore housing finance market and share of these companies with respect to the incremental market share will probably fall to 15 per cent at the end of 2008-09 from around 25 per cent during 2007-08.