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| Housing Finance firms want relief from base rate |
| Sudeep Jain / Mumbai Feb 19, 2010, 00:14 IST |
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Housing finance companies (HFCs), which rely heavily on banks for funds, have said that loans taken by them should be exempted from the proposed base rate system.
“If base rates are going to be as high as 9 per cent, there is certainly a case to exempt loans to HFCs from this floor rate. Banks get the benefit of priority sector lending by giving loans to HFCs. If this is not allowed, they may face difficulty in meeting their priority sector lending targets,” said RR Nair, director and chief executive of LIC Housing Finance. The company relies on bank term loans for 30-35 per cent of its funding needs.
Regulations require domestic banks to extend 40 per cent of their advances to segments in the priority sector category. This figure is 32 per cent for foreign banks. To bring greater transparency in the loan pricing process, the Reserve Bank of India has decided to scrap the concept of Benchmark Prime Lending Rate and replace it with a base rate. The rate will serve as a floor below which banks will not be allowed to lend.
For large lenders such as State bank of India (SBI), Bank of India and Union Bank of India, the rate is likely to be around 9 per cent, according to initial calculations. Other parameters such as tenor premium, credit risk premium and product-specific operating costs will have to be added to the rate to arrive at the final lending rate.
At present, large HFCs can access bank term loans at 6-8.5 per cent.
“If the move leads to a rise in costs of funds, the increase may have to be passed on to home buyers,” said a senior executive of HDFC, the country’s largest mortgage financier.
“HFCs help banks meet priority sector lending targets. They also enable banks to lend indirectly without incurring operational and origination costs. Hence, loans made to HFCs should be exempted from the base rate,” said Kapil Wadhawan, chairman and managing director of Dewan Housing Finance. DHFL relies on bank term loan to meet 66 per cent of its fund requirement.
Meanwhile, banks, under the umbrella of the Indian Banks’ Association (IBA), have sought that the target date for the base rate roll-out be pushed back to July 1, 2010, from April 1, 2010.
Bankers said this was necessary given the huge task of gathering segment-wise data to arrive at the new rates.
An IDBI Bank official said clarity was needed on definitions of cost of deposits and unallocable overheads.
A senior executive of the public sector bank said the switchover entailed a measured change in business strategy that had to be discussed at the board level.
Most government nominees on banks’ boards are tied up with preparations for the Union Budget. “The matter cannot be taken up by circulating a resolution to members. It needs threadbare discussions. The approvals (from board) can only happen in April,” he said.
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