Banks gaining market share in home loans
The action on the home loan front has moved to a new turf. Banks are gaining market share from housing finance companies due to their cost advantage and ability to offer relatively cheaper loans to the consumer.
Housing finance companies have been forced to slash interest rates in order to remain competitive and protect their market share.
The Housing Development Finance Corporation took the plunge this week and slashed rates by 25-75 basis points.
"The money market has signalled a hardening in interest rates, yet we have decreased our lending rates on home loans," HDFC chairman Deepak Parekh said on Tuesday, announcing the reduction in interest rates.
Dewan Housing Finance on Thursday reduced its lending rates by 25-100 basis points. The company's managing director, Kapil Wadhawan, said the move was prompted by the series of rate cuts in the market.
According to a report published by a leading investment bank and brokerage house, HDFC lost market share during the nine-month period from March 2001 to December 2001.
While the leading player saw its share fall from 52 per cent to 49 per cent, the State Bank of India's share moved up from 14 per cent to 20 per cent, and that of ICICI Home Finance from 6 per cent to 12 per cent.
LIC Housing Finance was able to maintain its share at 14 per cent, but smaller players were hit as their shares dropped from 14 per cent to 5 per cent. SBI has reported a growth of 99.01 per cent in home loans to Rs 58.11 billion in financial year 2001-02, from Rs 29.20 billion in March 2001.
Interest rates across the board have practically become similar, ranging from 10-11 per cent on short-term loans of up to five years, and 11-12 per cent on loans of long-term maturities.
Housing finance companies say the latest rate cut will be the final correction in the home loan segment, though banks seem to be poised to slash interest rates further.
"Banks today enjoy advantages in terms of the cost of funds and a lower risk weight on home loans at 50 per cent, as opposed to housing finance companies' 75 per cent. This leaves room for a further reduction in the interest rates offered by banks," said Wadhawan.
ICICI's reverse merger with ICICI Bank augured well for ICICI Home Finance as the idea was to book future loans in the bank because the bank had cheaper sources of funding, said ICICI Bank's managing director and CEO, K V Kamath. He added that in view of the fact that banks could assign 50 per cent risk weight to housing loans, there was room for a reduction in rates.
But it is not interest rates that are the deciding factor. Customers nowadays easily translate interest rates into equated monthly instalments.
Even as HDFC slashed its rates by 25-75 basis points early this week, a comparison of the EMI clearly points to SBI and ICICI Home Finance scoring over others because they offer monthly rests as opposed to a yearly rest. Both HDFC and ICICI Home Finance offer 11 per cent on their respective floating rate products.
However, a Rs 100,00 loan taken for a period of 10 years, offered by ICICI Home Finance, works out cheaper, with an EMI of Rs 1,378 against HDFC's Rs 1,416.
ICICI Home Finance CEO, Rajeev Saberwal, said: "We are more competitive as our EMI is lower than that of HDFC because we offer loans on a monthly rest basis and not on a yearly rest."
Says a senior SBI official: "To an extent we are capturing other players' clients. The numbers are not very high because customers are not comfortable about shifting from one player to another".