October 2015 Interest rate on home loans to fall 25-30 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 25-30 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
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 2015. 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 2015. 2
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 8 688 1% Housing Finance Companies HDFC 1,620 2282 71% LIC HFL 1,007 1084 93% DHFL 427 569 75% GIC HF 60 66 91% Can Fin Homes 71 82 86% 3
CRISIL Research Impact note Analytical Contacts: Ajay Srinivasan Director, CRISIL Research Email: ajay.srinivasan@crisil.com Media Contacts Tanuja Abhinandan Jyoti Parmar Media Relations Media Relations Email: tanuja.abhinandan@crisil.com Email: jyoti.parmar@crisil.com Phone: +91 22 3342 1818 Phone: +91 22 3342 1835 4
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