Home loan firms may see new lending rate norms !

NHB to start the exercise for a smooth transition.

After banks, it’s the turn of housing finance companies to have a more transparent regime for pricing of loans. The National Housing Bank (NHB), the regulator for these companies, is working on a system that is similar to the base rate regime introduced for banks recently.

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"We will keep a close watch on how the base rate system works out for banks over the next two quarters. By March, we will have enough reference points to take a view, based on which, we should be in a position to start moving towards a similar regime," NHB Executive Director R V Verma said.

The base rate, substitute for the earlier benchmark prime lending rate (BPLR) for banks, was introduced from July 1. The country’s largest lender, State Bank of India, fixed its base rate at 7.5 per cent. The rate for most banks is in the range of 7.25 to 8 per cent.

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Housing Development Finance Corporation and LIC Housing Finance are two major players in the home loan market. Since they come in the non-banking financial institution category, they were excluded from the base rate system.

Analysts said introduction of a base rate was likely to put pressure on housing finance companies because of the transparency it would bring. There are expectations that market forces (read home loan borrowers) might put pressure on them to make rates more transparent.

"Housing finance firms would be under a lot of pressure to come up with a more transparent mechanism. The floating rate of interest will have to be based on certain parameters that will move in both directions. It cannot remain sticky for too long any more," said a banker.

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The main problem for these companies in moving to such a system is their cost of funds. While banks depend on a more stable system, of deposits from their consumers, home loan companies have to borrow from banks and other sources.

"Home loan companies are more heterogeneous than banks. Their cost of funds, therefore, is quite different," added Verma!

                                                                                                     Source:- Business Standard