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The loan boom

Published : Mar 11, 2005 00:00 IST

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The housing industry continues to be on the upswing thanks to the easy availability of finance and a huge latent demand for housing across the country.

in Mumbai

WITH a plethora of banks and financial institutions offering a variety of housing loan products, home loan borrowers in the country have never had it better. A marginal rise in interest rates last year notwithstanding, banks and institutions continue to elbow one another out of the way to woo customers by offering them better rates. In fact, industry analysts are of the view that the home loan market, which has been aiding the profitability of most banks over the past few years, will grow at the rate of 35-40 per cent this year as against a growth rate of 30-35 per cent last year. Home loan disbursements are expected to cross Rs.65,000 crores as against Rs.51,000 crores last year. Not only are home loans among the fastest-selling retail products flying off the shelves of banks, but these days, they are also an excuse to cross-sell other retail products like insurance and car loans. Sometimes, other `value added services' are also thrown in, such as legal and technical assistance, loan counselling, and any other service that may be required by the borrower during the life of the loan.

It appears that borrowers are still willing to take a chance on the direction of interest rates on housing loans, as evidenced by the growing demand for floating rate products. Over the past couple of years even as the housing loan industry has been witnessing a boom, floating rates have emerged as hot favourites as opposed to fixed rate loans. Towards the end of 2004, there was some upward pressure on home loan rates in the industry, following which there was a spurt in the demand for fixed rate loans.

However, banks and financial institutions are of the view that despite the marginal hardening of home loan rates, customer preference has now gone back to floating rates, as they believe that interest rates will remain stable in the medium to long term. Analysts contend that floating rate loans are favoured because fixed rate loans are usually a little more expensive - approximately over 1 per cent higher than floating rate loans, in most cases.

"Interest rates never move in a single direction; they always go up and down. Over a 15-20 year loan period, the rate gets evened out when it is on a floating basis. Everyone knows that in the long term, rates will not harden substantially, as it is in the government's interest to keep them softer to aid its borrowing costs. So regardless of whether they have an understanding of the market conditions or not, most borrowers prefer floating rate loans," an analyst said.

Even when there are concerns about the direction of interest rates, industry players are firmly of the view that since there is still a lot of latent demand in the housing finance sector, a 50-100 basis point increase in rates will not have any great implications for the demand for home loans. This is because they feel that the industry has come a long way, from a regime where interest rates ruled much higher than where they are at now, with no fiscal incentives to borrow home loans. Interest rates have almost halved in the past decade and made home loans available to a wider class of people.

The home loan explosion is not restricted to urban markets. It has spilled over to semi-urban and rural markets. In fact, there is a school of thought that even as the urban markets may be saturated to some extent, the so-called Tier-II cities and towns still offer tremendous marketing potential for these products. While metros are Tier-I cities, Tier-II cities can be broadly defined as State capitals and bustling towns; other semi-urban and rural centres are known as Tier-III areas.

However, the housing finance sector has also been plagued by the concern that many of the new entrants in the business may be looking at growth without taking into account the fundamentals such as security and asset quality. Added to this, the cut-throat competition in the metros, resulting in rate wars, has led a number of banks and financial institutions to lend below their cost of funds.

Commenting on what customers must look for while opting for a home loan, a spokesperson of the Housing Development Finance Corporation (HDFC) said that opting for a home loan is a big decision for most people, as their relationship with the bank usually spans 15-20 years. Hence, customers must look beyond mere pricing aspects and seek clarity on the kinds of value-added services that are being offered. These are important aspects one needs to look for as they may have long-term implications for the entire transaction. Customers need to pay more attention to the property they are planning to buy and arm themselves with information on whether it is a sound buy and whether the builder has all the necessary official sanctions and a sound track record in terms of timely delivery and so on, he said.

HDFC was incorporated in 1977 and was the first company to offer home loans. It has assisted more than 2.5 million families to own homes, through housing loans worth over Rs.80,500 crores. It has turned the concept of housing finance for the growing middle class in India into a profitable, professionally managed enterprise. HDFC today has a network of 180 offices spread all over the country. It has, through its experience of over 27 years, acquired the relevant expertise to guide its customers across the country. It shares its database and experience of dealing with builders across the country with its customers. Over and above this, HDFC also offers a wide range of products under one roof. There are customised products that facilitate the optimisation of tax benefits, taking a call on interest rates, repayment facilities such as step-up repayment facility, flexible loan instalment plan, and balloon payment.

HDFC has from time to time, tied up with developers to bring special packages to its customers. The product range includes a home improvement loan, a home extension loan, a home conversion loan that facilitates a smooth conversion of one loan to another, a bridging loan, and a home equity loan.

Interest rates should not be the only determining factor while going in for a home loan. Kapil Wadhawan, managing director of Dewan Housing Finance Ltd (DHFL), a leading housing finance company, said issues such as the legal aspects determining security and the valuation of property to ensure that it covers the value of the loan need to be looked into. Customers also prefer one-on-one interactions with the lending company and not just with agents and direct sales agents, he said.

DHFL today has 45 branches and 160 convenience centres across the country. Since its inception in April 1984, DHFL has evolved into a total home finance solutions provider, catering to the diverse needs of home buyers. Housing finance companies are also looking to broaden their reach to different segments of the market, while competing with one another.

LIC Housing Finance Ltd, the second largest housing finance company in India, introduced the concept of `Care Homes' a couple of years ago. Care Homes is a model retirement village, where financially self-sufficient people can live in a community that creates a caring family-like environment through mutual support. The first Care Home has been set up in Bangalore and is an eco-friendly, self-contained retirement village. These homes are built in a verdant atmosphere with tree-lined pathways. Independent cottages with skid-free flooring, glare-free surfaces, supportive railings, an instant-alarm system, Internet facility, telephone and television connections. Care Homes are fully self-contained and have a community kitchen and health-related facilities.

"We have sold around 50-60 per cent of the houses in our first phase of the Care Homes project. This is a social commitment of our organisation, to provide good homes to senior citizens at affordable prices. We are on the lookout for cheap land where we can set up similar housing in other States as well," said Arun Dasgupta, Managing Director, LIC HFL. The company plans to set up its second Care Homes project in Hyderabad, and is also in negotiations with the State governments of Kerala, Maharashtra and Orissa for similar ventures.

Commenting on the home loan market in India, Dasgupta said since there was a huge gap between demand and supply, the potential for housing was enormous. However, he cautioned: "At the end of the day the customers have to read the fine print before opting for any loans." LIC HFL was incorporated on June 19, 1989. The company was promoted by the LIC and went public in 1994. It is recognised by the National Housing Bank and listed on the National Stock Exchange and the Bombay Stock Exchange.

(This story was published in the print edition of Frontline magazine dated Mar 11, 2005.)

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