Execution Lag Unsaid Glitch In Floating Rate Loans

If you thought that floating rate housing loan products are really floating, think again! They are not. The biggest player on the home loan turf, Housing Development Finance Corporation (HDFC), takes six months to pass on the advantage of the "floating" rate home loan products to its customers.

Ditto is the case with a relatively small player like Dewan Housing Finance. ICICI Home Finance, too, passes the advantage once in every three months --- April, July, October and January.

In other words, if today HDFC and Dewan Housing cut their floating rate product say by 50 basis points, the customers will have to wait for six months to get the low interest rate advantage.

 

In ICICI's case, the waiting period is three months. Of course, in a rising interest rate scenario, the customers gain as they are not paying the higher rate immediately.

LIC Housing Finance (LICHF), however, resets the rates in a month. Says its managing director Kranti Sinha : "We reset our rates on a monthly basis, as we have systems in place to handle the modification in rates".

What is ICICI's defence for the delay? Here is what ICICI Home Finance chief operating officer Rajiv Sabharwal has to say: "We are dealing with a huge customer base and it is thus difficult to make the necessary changes, inform the customer and take into account the postal delays in a shorter time frame."

HDFC also does not find it easy to give the effect of the floating rate immediately because of its very large customer base.

In a falling interest rate scenario, a player like HDFC does not change the equated monthly instalment (EMI) of the customers as a fluctuating EMI can create problems when one's cash flow is stable. So the impact is felt on the tenure of the loan. In other words, a customer's monthly outgo remains the same but the tenure of the loan comes down when the rate is lowered.

State Bank of India (SBI) resets its rates immediately on modification of its medium term lending rate, on which the interest rate on housing loans are pegged. Most banks reset their rates every time they adjust their rates.

This is possible considering the advantage banks have over housing finance companies with the ability to tap low cost funds: savings and current accounts. "Restricted by the National Housing Bank (NHB), we are unable to raise funds through fixed deposits for period of less than one year," says Dewan Housing Finance managing director Kapil Wadhwan.

What more, the customers do not get the advantage of a floating rate always. For instance, the benefit of the recent announcement made by SBI on cutting its interest rates on home loans has been limited to loans offered to new customers. SBI officials admit that the objective is to gain market share. Another leading housing finance company adheres to the same logic, saying: "The industry will see more players moving on similar lines of offering products to new customers for a limited time period. The question is whether the cost of funds allows for this, and whether one would really lose market share if it fails to align its rates with the leading players".