CRISIL Research Impact note

Transcription

1 October 2015 Interest rate on home loans to fall bps more: CRISIL Research RBI move to cut risk weight will benefit 70% of home loans, 80% of borrowers CRISIL Research expects interest rate on home loans to come down by another basis points (bps) over the next few months, triggered by the Reserve Bank of India s (RBI) move late on Thursday to lower risk weights on select home loans (up to Rs 75 lakh) where borrowers are willing to put in more money and thus lower the loan-to-value (LTV) ratio. While the National Housing Bank (NHB) has not yet revised its risk-weight norms for housing finance companies (HFCs), going by past history (NHB typically follows the RBI with a lag), we expect the NHB to follow suit. Theoretically, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks. However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal. Around 70% of home loans, 80% of borrowers to benefit from lower risk weights The RBI has lowered risk weights on housing loans of up to Rs 75 lakh from 50% to 35% in cases where the borrower puts in at least: 20% of the value of the home as own equity for loans up to Rs 30 lakh; and, 25% of the value of the home as own equity for loans between Rs 30 lakh and Rs 75 lakh Home loans: Regulatory norms on risk weights and LTV Banks HFCs Earlier Now Current LTV Risk w eight LTV Risk w eight LTV Risk Weight Upto 20 lakh 90% 50% <80% 35% <75% 50% > 80% and 90% 50% >75% 100% 20 lakh to 30 lakh 80% 50% <80% 35% <75% 50% >75% 100% 30 lakh to 75 lakh 80% 50% 75% 35% <75% 75% > 75% and 80% 50% >75% 100% Above 75 lakh 75% 75% 75% 75% 125% Source: Reserve Bank of India; National Housing Board 1 1

2 CRISIL Research Impact note CRISIL Research estimates that around 80% of home-loan borrowers and 70% of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation. LTV ratios for home loans have been moving down over the years. Data on home loans disbursed across 13 cities show average LTV has come down from 75% in the third quarter of fiscal 2010 to 66% in the same quarter of fiscal This means a higher proportion of new loans would meet the criteria for lower risk weights. Home loan borrowers in smaller cities are likely to be the biggest gainers from the RBI move due to limited supply at affordable price points in the larger cities. As per CRISIL Research s analysis, around a quarter of the incremental housing stock supply in the top 10 cities would have a price point lower than Rs 40 lakh. The RBI has over the years been relaxing regulatory norms for home loans, taking cognisance of the healthy asset quality and low credit losses in this segment. In June 2013, it created a sub-category within the commercial real estate (CRE) segment for residential housing (CRE-RH) and notified a lower risk weight for this segment compared with the CRE segment. Subsequently, in July 2014, the RBI permitted banks to raise long-term infrastructure bonds for the purpose of funding affordable housing. These bonds are exempt from mandatory norms such as cash reserve ratio and statutory liquidity ratio. Increasing competition to push interest rates downwards Lower risk weights in a scenario where competition in the home loan market is intensifying and interest rates cycle is easing would push down interest rates for home loans, thereby limiting any gains on the RoE front for banks. Competition in the home-loan space has increased manifold in the last 3-4 years, as more financiers have entered the market, attracted by low penetration, relatively high and stable growth rates, and healthy asset quality. Over the past one week, two new players Bajaj Finance and Hinduja Leyland Finance -- have been granted housing finance licences by the NHB. Because of increasing competition, the cumulative market share of the top 3 HFCs in aggregate home loans outstanding of HFCs has declined from 85% in fiscal 2011 to 79% in fiscal

3 Annexure Home loans as a proportion of total portfolio 71.9% 10.8% 8.3% Private Banks Public sector banks HFCs Proportion of Housing Loans Source: Company reports Entity-wise home loan portfolio Public Sector Banks Source: Company reports Home loan portfolio (Rs. Bn) Total advances (Rs. Bn) Proportion of Housing loans State Bank of India 1,592 13,354 12% Bank of Baroda 225 4,281 5% Bank of India 167 4,117 4% Punjab National Bank 215 3,805 6% Canara Bank 165 3,300 5% Union Bank of India 188 2,628 7% Private Sector Banks ICICI Bank 891 3,875 23% HDFC Bank 159 3,655 4% Axis Bank Ltd 537 2,811 19% IndusInd Bank % Housing Finance Companies HDFC 1, % LIC HFL 1, % DHFL % GIC HF % Can Fin Homes % 3

4 CRISIL Research Impact note Analytical Contacts: Ajay Srinivasan Director, CRISIL Research Media Contacts Tanuja Abhinandan Jyoti Parmar Media Relations Media Relations Phone: Phone:

5 Our Capabilities Making Markets Function Better Economy and Industry Research Largest team of economy and industry research analysts in India Acknowledged premium, high quality research provider with track record spanning two decades 95% of India s commercial banking industry by asset base uses our industry research for credit decisions Coverage on 86 industries: We provide analysis and forecast on key industry parameters including demand, supply, prices, investments and profitability, along with insightful opinions on emerging trends and impact of key events Research on sectors and clusters dominated by small and medium enterprises covering analysis of relative attractiveness, growth prospects and financial performance High-end customised research for many leading Indian and global corporates in areas such as market sizing, demand forecasting, project feasibility and entry strategy Funds and Fixed Income Research Largest and most comprehensive database on India s debt market, covering more than 18,000 securities Largest provider of fixed income valuations in India Provide valuation for more than Rs.70 trillion (USD 1,167billion) of Indian debt securities Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 38 standard indices and over 100 customised indices Ranking of Indian mutual fund schemes covering 73% of assets under management and Rs.7.2 trillion (USD 120 billion) by value Business review consultants to The Employees Provident Fund Organisation (EPFO) and The National Pension System (NPS) Trust in monitoring performance of their fund managers Equity and Company Research Largest independent equity research house in India,; coverage exceeds 140 companies First research house to release exchange-commissioned equity research reports in India; covered 1,488 firms listed and traded on the National Stock Exchange Assigned the first IPO grade in India; graded more than 100 IPOs till date Executive Training Conducted training programs on a wide spectrum of topics including credit, risk, retail finance, treasury, and corporate advisory; trained 20,000 more than professionals till date Training programs being conducted in India, Sri Lanka and Bangladesh through an extensive network of well-qualified financial professionals

6 About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. About CRISIL Research CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the Indian economy, industry, capital markets and companies. We also conduct training programs to financial sector professionals on a wide array of technical issues. We are India's most credible provider of economy and industry research. Our industry research covers 86 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 5,000 primary sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed income markets. We are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. We are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today the country's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macro-economy and our extensive sector coverage to provide unique insights on micromacro and cross-sectoral linkages. Our talent pool comprises economists, sector experts, company analysts and information management specialists. Disclaimer CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (C-CER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval. CRISIL Privacy Notice CRISIL respects your privacy. We use your contact information, such as your name, address, and id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of McGraw Hill Financial you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit You can view McGraw Hill Financial s Customer Privacy at Last updated: August, 2014 CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai India Phone: Fax: CRISIL Ltd is a Standard & Poor's company