Banks Vs Hfcs

In December 1997, Corporation Bank had launched its housing loan product in metros priced at 13 per cent for a Rs 5 lakh loan. This rate was about 2 percentage points lower than that charged by other HFCs making the bank loans very attractive. Banks enjoy the advantage of lower cost of funds enabling them to price these loans lower.

One disadvantage which these loans suffered from was margin requirements. Corporation Bank in normal circumstances would give a loan for up to 65 per cent of the property cost only. HFCs on the other hand finance about 85 per cent of the cost. This is a big hindrance, especially in a secondary market transaction where there is a cash component that along with the 35 per cent margin will mean a hefty contribution from the purchaser. With this margin requirement now removed banks can restructure their products to make them more competitive.

 

Again, an RBI guideline that housing loans could be for a maximum of 15 years was disadvantageous compared to HFCs who give loans for 20 years. This lowers the instalment payable for the same loan amount thereby widening the range of prospective customers. The five-year limit on the age of the property to be financed, too, was unrealistic. Banks can now give loans based on the quality of the dwelling which depends on factors other than age, too. With these hurdles removed banks can now compete effectively. However, to be a real threat banks need to bridge the gap in terms of service, in which companies like HDFC have set high standards.