Bankers fear new borrowers will prefer housing finance firms

The National Housings Bank’s (NHB) latest circular waiving penalty on full home loan prepayment may give housing finance companies (HFCs) an edge over banks this festival season.

Bankers said the Reserve Bank of India (RBI) should also issue the same guidelines for banks to avoid a situation where HFCs have an advantage over banks. R S Sangapure, general manager, Central Bank of India, says, “Even the RBI may waive prepayment penalty soon. We expect to hear something in a month or so because prepayment penalty is an important parameter for customers to choose a lender.”

Yesterday, NHB said HFCs could no longer charge a penalty on the closure of floating-rate loans, even if paid with borrowed money (implying through another loan from another financial institution). Closure of fixed-rate loans will attract a penalty unless paid through own sources. More than 95 per cent home loan borrowers take loans on floating rates.
 

SHARE PRICES TANK Prepayment penalty waiver move battered stocks
	20-Oct price (Rs)	change#   (%)
LIC Housing Fin	217.55	-6.37
HDFC	644.95	-4.27
Dewan Housing	219.70	-1.94
GRUH Finance	531.95	-1.57
# Over previous close Compiled by BS Research Bureau

At present, three banks — State Bank of India, IDBI Bank and Axis Bank — do not charge a prepayment penalty. However, most others such as ICICI Bank and HDFC Bank charge a prepayment penalty. While announcing the closure of teaser loans on April 21, SBI chairman Pratip Chaudhuri had said all new customers would not have to pay pre-closure charges.

Banks charge 1.5-4 per cent on full prepayment of loans. For instance, ICICI Bank charges 2-4 per cent, according to its website. Earlier, both banks and HFCs used to charge a prepayment penalty if the customer wanted to foreclose a loan. However, many qualified their prepayment penalty cost by saying it would not be charged ‘if paid through own source funds’. However, the customer had to go through various rigours to prove the money came from their ‘own sources’ and not from another lender.

A senior banker at Oriental Bank of Commerce said he expected many new borrowers to prefer HFCs for the sheer ease of being able to pay off loans whenever they had a surplus. “And, this will further dent the festive loan growth targets,” he said.

While the Reserve Bank of India has been talking about waiving the prepayment penalty, nothing has been officially announced.

Banks fear the new regime will also lead to pricing issues because in a competitive market, there could be a rate war between different players to attract customers.

There could be internal competition between HFCs as well. According to Harsh Roongta of Apnapaisa.com, this waiver will especially be useful for people who have taken loans from HFCs before 2010 and are paying interest rates as high as 12-14 per cent even though new customers are offered 10.75-11.25 per cent by the same lenders.

However, if one has a fixed-cum-floating rate loan, such as LIC Housing Finance's five-year fixed-rate loan, the benefit will come only if one is in the floating-rate period of the loan as fixed-rate loans will not have a prepayment charge only if paid through own funds.