A proposal to introduce a two or three-year lock-in on home loan balance transfers is before the housing finance regulator, with several big lenders pushing for a restriction on such a facility in the initial years of the loan term on the grounds that it causes undue churning in their portfolio.
National Housing Bank, the sectoral regulator, is currently engaged in discussions with home finance companies on the issue, a Finance Ministry official told The Indian Express.
With interest rates on home loans dropping by around 120 basis points over the last six months, many customers have opted to transfer their outstanding principal amount at lower rates being offered by competing lenders in the industry, which has forced some of the bigger players to petition the regulator.
Sources in the industry confirmed that “frenetic discussions” are currently on between the housing finance companies and the NHB over the issue of introducing a minimum lock-in period of up to 3 years for balance transfer facility on home loans. The proposal to introduce a minimum lock-in, however, does not call for such restrictions in case the prepayment is done through own source of funds.
Those in favour of imposing a lock-in period say it is creating unnecessary churn within the industry, with the beneficiaries being agents and brokers who earn a fee on the same. Those against the move argue that introduction of a minimum lock-in period is akin to going back to reintroducing prepayment penalty for customers, which will make the market inefficient once again.
“Before the prepayment penalty was removed, the market was inefficient and lacked transparency and customers did not benefit from a decline in interest rates in the market. However, the removal of prepayment penalty (on prepayment through own money or balance transfer) forced all players to pass on the benefits to their existing customers in a more efficient manner. Discouraging balance transfer will be like re-imposing prepayment penalty,” said the head of a leading housing finance company.
A senior official with another leading housing finance company, argued that such a restriction is important. “Balance transfers in quick time is an unproductive aspect of the industry. While it does not lead to an increase in the size of loan book for the industry, it only ends up benefitting the agents and brokers who earn fee on such churns,” said the official.
Some housing finance company officials feel that many banks are pushing for balance transfers as the gross credit growth for the banking industry has been in low single digits over the six to eight months and the home loan market continues to be a high growth area.
RBI data shows that while the gross bank credit for banks stood at 4.3 per cent in April 2017, the housing loans for banks grew at 13.4 per cent. In fact, some of the leading housing finance companies have been growing at more than 20 per cent.
In June 2014, the Reserve Bank of India directed banks not to levy any prepayment penalty or foreclosure charge on floating rate term loans. Since then there has been an increasing trend of balance transfers as customers look out for a better deal with another player on their outstanding loan amount.
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