Banks to benefit more than HFCs through long-term bonds: Icra

Says incentives announced by the RBI may also lead to an increase of market share for banks

Domestic ratings agency Icra today said banks, especially the state-run ones, will benefit at the expense of housing finance companies through the RBI norms for long-term bond raising for affordable housing.

The incentives announced by the RBI "are likely to have a positive impact on banks' competitive position vis-a-vis the housing finance companies", it said in a note.

The measures, announced on Tuesday, may also lead to an increase of market share for banks beyond the current 63% in the home finance market, which stood at Rs 9 trillion (Rs 9 lakh crore) as of March 2014, it said.

The Reserve Bank had issued the guidelines covering incentives for issuance of long term bonds by banks for financing of affordable housing and infrastructure after an announcement in the last week's Union Budget.

The guidelines say banks can raise long term resources to finance their long term loans to affordable housing through minimum regulatory pre-emption like exemption in the mandatory government security holding and cash reserve ratio and priority sector lending, Icra said.

The state-run banks, which have a better presence in the lower ticket loans segment, will benefit more as the definition of what constitutes as affordable housing has been enlarged, it said.

According to the RBI, loans of up to Rs 5 million (Rs 50 lakh) for property value of up to Rs 6.5 million (Rs 65 lakh) in six cities and up to Rs 4 million (Rs 40 lakh) in others qualify as affordable housing now.

Icra said once banks start hitting the street with offers, insurance companies and mutual funds, who typically invest in such securities, will get more options to invest their money.

As banks are better rated and a safer bet, the housing finance companies will again have a difficult time raising the required resources for on-lending, it said.

"On one hand the regulations may improve competitive position of banks, on the other, it may also lead to increase in cost of funds especially for higher rated HFCs as the traditional long term investors would have a limited corpus and larger number of high quality issuers to choose from," Icra said.

Housing finance companies focused on the affordable housing segment, may, however, get some relief as bank loans to such companies will get some regulatory relief and can benefit through improved fund availability and lower cost of funds, it said.

The level of issuances from banks, Icra said, will be dictated by their ability to raise floating rate bonds as home loans are typically floating rate in nature which helps them manage interest rate risk and also find investors for the large issuances.