NEW DELHI, NOV 4: Housing finance companies are planning to dump their long-standing main fund provider, National Housing Bank (NHB), in favour of commercial banks following NHB's decision to increase the refinance rate.With NHB raising its refinance rate from 12 to 12.25 per cent, the margin of HFCs has come down to 0.75 per cent from one per cent as their prime lending rate is 13 per cent.On the other hand, the prime lending rate of commercial banks at 12 per cent is cheaper than NHB's refinance rate.Currently, all HFCs are largely dependent on NHB for their borrowings but this dependence is likely to get reduced drastically in the future.When contacted, PNB Housing Finance Ltd managing director R Nambirajan confirmed that housing finance companies had started negotiations with commercial banks for raising funds. "PNB Housing Finance is negotiating with some commercial banks to get funds at competitive rates," said Mr Nambirajan.The increase in NHB's refinance rate has dealt a double blow to HFCs. While it has reduced their margins, it has also weakened their competitive position vis-a-vis commercial banks which have been increasing their exposure to the housing finance sector over the last couple of years.The sourcing of funds from commercial banks will, however, expose HFCs to the variable interest risk, from which they are insulated when sourcing funds from NHB.To minimise this risk, HFCs are negotiating with commercial banks to evolve some mechanism. "We have asked them to put a cap of 0.5 per cent on either side, in case there is an increase or decrease of interest rate," Nambirajan said without disclosing the names of the banks.HFCs have also expressed their anguish over the recent NHB decision to calculate a levy of one per cent on prepayment of the loan amount proposed to be prepaid for the unexpired period of loan, on a yearly reducing balance (YRB) method."The circular is not only in contravention of the article 16B(1) of NHB Act but also a major setback to HFCs who are currently facing stiff competition from commercial banks," Mr Nambirajan said and added that the levy calculated on a YRB method will work out at around three per cent.To compete with commercial banks, who are offering housing loans at competitive rates, HFCs are demanding reduction in the mandatory limit of loans from 75 per cent of the total borrowings to about 40 percent.HFCs have also requested the Reserve Bank to provide cheaper funds to them as was the practice earlier. "Commercial banks are getting funds at a cost of eight per cent through the RBI. Even if the administrative cost of 2.5 per cent is added, it works out at 10.5 per cent, a comparative advantage of over 150 basis points," a senior official of an HFC said.HFCs had requested the NHB to reduce the refinance rate from 12 to 11 per cent to compete with commercial banks. NHB, however, increased the refinance rate by 25 basis points as its borrowing cost is stated to be over 12.05 per cent.
