Commercial banks are likely to increase their market share in the highly competitive housing loans business due to their lower cost of funds compared with housing finance companies (HFCs), experts said.
According to experts, the cost of funds for HFCs has increased by 80-100 basis points (bps) since the Reserve Bank of India (RBI) started hiking the repo rate. On the other hand, banks continue to enjoy a relatively lower cost of borrowing due to access to cheaper public deposits, they said. The RBI has increased the repo rate by 250 bps to fight high inflation. One basis point is one-hundredth of a percentage point.
“Banks will continue to dominate the home loan market as most NBFCs are facing the heat of rising interest rates, while banks have a lot of sources through which they get low-cost funds. Hence, the share of banks in home loans will increase in a rising interest-rate scenario,” said Raoul Kapoor, Co-CEO of Andromeda Sales and Distribution.
“Banks have a strong liability profile because they raise funds directly from depositors. For them, housing loans are a very good asset class because it’s long term and the credit losses are very low,” said Sanjay Agarwal, Senior Director, CareEdge Ratings.
Per Emkay Global Research, banks’ share of the individual home loan market has been around 64-68 percent, and that of HFCs has been 32-35 percent between 2010 and 2022.
In its report, the research firm said that most public sector banks, including the State Bank of India (SBI) and Bank of Baroda (BoB), are looking to drive growth mainly through mortgages and thus, are looking at offering lower rates.
In addition to this, the merger of HDFC Bank and HDFC in a quarter or so should increase competition in the market, said Anand Dama, Senior Research Analyst, Emkay Global Financial Services, in a research report.
Dama further said that the affordable housing space is facing the heat of lower rates, as players are finding it difficult to replicate their success in this space.
However, with the turn in the interest rate cycle, HFCs got the opportunity to reprice their offering upwards. And with the faster repricing of loans than liabilities, margins have been largely protected, India Ratings said in a report.
“A further uptick in external benchmark-linked rates may not necessarily lead to an uptick in home loan lending rates as banks could adjust the credit risk premium or spread over the benchmark to absorb the impact partially or fully,” the rating agency added.
On the Sectoral Deployment of Bank Credit in February 2023, the RBI has notified that the deployment of gross bank credit has risen 2.1 percent as on February 24, 2023, to Rs 6.2 lakh crore.
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