Home Loan sector going strong
The segment of home loans continues to witness strong growth despite the slowdown in the economy. According to the vice-chairman & CEO of HDFC Ltd – Keki Mistry; the fiscal year of 2014 is expected to be yet another year of good growth in regards to home loans as customers bring forward home purchases to take advantage of tax incentives announced in this year’s budget.
However, Mistry cautions that home loan rates may not see a steep reduction in the next six months as the cost of funds for lenders is still to come down in a sustainable manner.
Probable factors affecting rate change.
The different sources of funds for banks such as the deposit rates and base rates of banks have not come down. Bond yields have started coming down. Further, taking points historically, rates always tend to tighten in February and March. By April, the government starts to spend and liquidity starts to enter the system, interest rates start to soften, and bond yields start to come down.
Since in India the inflation numbers are headed lower it should probably facilitate lower rates. However the point to be taken in consideration is that when RBI cuts rates, the banks cannot necessarily pass on the benefits. Then again RBI cutting rates doesn’t add liquidity into the system. It reduces the amount of interest a bank pays and it is a signal to the market. Hence, the ability of banks to cut rates does not depend on when RBI cuts rates but when they can reduce their deposit costs.
Effects of reduction in Market rates and bond yields.
In the current market scenario only bond yields are reducing. New funding costs do come down when bond yields come down. But the reduction is limited only to new funding costs and not the old existing liabilities on the balance sheet. Banks have to constantly monitor their cost of funds and only if the costs of funds reduce can the bank pass on the benefit to customers. The general target of banks is to keep the spreads in the range of 2.25-2.35%.
Passing of the benefits to customers.
As of now, the point where banks can pass on a rate cut without impacting spreads has not materialized. In this regard banks differ from one another depending on their business model and strategy. For instance, bank XYZ reduces their rates by 1%. This is being done by XYZ either to attract new customers, increase their portfolio, marketing/sales strategy or simply because their cost of funding has reduced to a level where the cost in the balance sheet is also down. The same might not be possible on the investments of bank ABC.
Home Loan Market trends in India.
The home loan market of India is faring well in terms of growth. The numbers for March has recorded the growth of individual loans between 27 to 31 percent for most banks. Furthermore, this year’s budget has added an additional tax benefit. For a first time home buyer this would translate into additional tax benefits to the tune of Rs. 1 lakh. For example, Mr. Ram takes a loan of less than Rs 25 lakh after April 1, 2013, and before March 2014, and his property is valued at less than Rs 40 lakh, then he will be entitled to an additional benefit of Rs. 1 lakh that has to be exhausted within a period of 2 years. As per this, customers would be benefitted if they push their purchases forward and apply for the loan by March of 2014.
Residential realty trend in India.
The home loan markets across the country, are seeing exponential growth. This growth is not restricted only to tier-2 and tier-3 cities but also to the periphery of metropolitan cities. So, for exemplification, the growth in the region of Pune is taking place in Kolhapur, Solapur and Sangli; similarly, there is huge demand from Noida, the entire NCR region and Ghaziabad in Delhi.
Drop in home prices.
The demand for real estate is not necessarily supported by a drop in home prices. Point in case being that there were hardly any price drops. In fact, the price increases of 2012 were slightly muted. Nevertheless, prices by and large have maintained and upwards trend and so have the levels of income. The affordability ratio, which is the most important ratio to be considered has remained stable, notwithstanding the fact that property prices have gone higher. This is attributed to the rise in income levels.
Inter-bank competition.
Since corporate loans have become stagnant banks are under pressure to push retail loans. Inter-bank competition too has increased. The most important thing is the demographics, in India. In western countries, people in their late 20s buy their own houses. In India, the average age of a customer applying for a loan ranges somewhere in the mid to late 30s. Almost 60% of India’s population is below 30 years of age. Within the next 5 to 15 years all these people will need houses and hence housing loans. Presently urban India’s shortage of housing amounts to 26.53 million units. Additionally, rapid urbanization is taking place across India. All these factors combined lead to the suggestion that there are ample opportunities for home loans.
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