Housing finance lending rates likely to harden

MUMBAI, FEB. 26. The housing finance lending rates are likely to harden as the incremental returns on housing finance loans are very low, stated a study conducted by the rating agency, Crisil.

The incremental RoE for banks, on its housing finance business, is at best 9 per cent as compared to RoE of 18.8 per cent in 2002-03. Even the incremental RoE for the housing finance company (HFC) is low at about 7 per cent in comparison with 20.5 per cent in 2002-03.

Crisil believes that such low returns are unsustainable in the long run and could push up interest rates by 50 to 100 basis points. This increase could be lower if the players are able to contain non-performing loans (NPL) in the housing finance portfolio.

Housing loan rates have fallen by about 675 basis points since April 2000, which is higher than 580 basis points decline in the benchmark ten-year government securities (G-Sec) rate (taken as the risk-free rate). In the last year itself, as competition intensified, rates have declined by 250 basis points.

"The non-performing loans (on a lagged basis) in the housing finance segment in India are quite high at about 3.3 per cent today," said Raman Uberoi, Director, financial sector rating, Crisil. In contrast, housing finance players in a developed country like the U.S. have NPLs of below one per cent. Besides genuine problems, these high NPLs are a reflection of the industry's aggressive marketing tactics, absence of credit bureau and some inadequacies in the appraisal standards and systems. The rating agency, however, feels that housing finance players have a limited potential to reduce their NPLs in the short to medium term. Hence interest rates are bound to firm up in such a scenario as players are not making adequate profits for their stakeholders.

"Banks have been focusing on the housing finance segment as it is showing good growth rates. Despite low returns, the sector is a better alternative than parking funds in G-secs, where the RoE is negative," said Roopa Kudva, Executive Director and Chief Rating Officer, Crisil.