A sharp headline growth in home loans hides a vital aspect that is harming the industry — takeover of home loans from one by the other — which is estimated to have jumped to as much as 20% of all mortgages sanctioned.
The takeover of loans by luring existing customers of banks and home finance companies has led to even chairman of Housing Development Finance Corp Deepak Parekh calling for a kind of regulations, at least in early years of the loan’s duration.
An indiscriminate poaching of customers of one company by another erodes the profitability and eventually will lead to higher costs for customers as lenders at the first stage would begin to factor in the charges and recover them early in the loan’s tenure instead of spreading it out over 15 years.
“Lenders are incurring losses as increasingly balance transfer of around 20% to another institution is taking place with the prepayment penalty being waived off,” said Karthik Srinivasan senior vice president, ICRA, a unit of Moody’s. “Lot of housing finance companies are building their own sales force and driving sales internally to retain borrowers for a longer prior of time.”
With mortgages becoming the safest part of Indian lending, from banks to small lenders, in various forms, are pushing for a higher share of home loans. What used to be just 3 to 5% a few years ago has climbed to more than 20% as the regulator waived off pre-payment penalty. It used to be 2% of the outstanding loan. While that has benefited consumers, home loan companies are frowning as they incur costs in acquiring customers, while the one who takes over just pays the middlemen.
HDFC chairman Deepak Parekh, in his letter to shareholders, said that no one gains in this game, except the agent who keeps collecting commissions.
“Lenders do incur costs while originating loans,” Parekh said. “It is logical that there be some compensation to a lender — especially when a customer is poached within a time frame of say, less than two years. To my mind, regulators should not encourage ‘lazy housing finance’.”
A large part of housing finance companies’ business comes from direct selling associates. DSAs try to move loan from one lender to another luring them towards lower interest rate and a higher loan to value.
This higher loan to value also raises the risk in the system with not much equity for lenders to recover in case of a simultaneous default and falling real estate prices.
“While the balance transfer is good for customers, if there is a topup, it increases the risks of the financial institutions and that needs to be avoided,” said Sriram Kalyanaraman MD of National Housing Bank.