HDFC has slashed home loan rates by 25 to 75 basis points. HDFC has reduced its retail prime lending rate (RPLR) by 75 basis points to 12.75%. All the floating rate loans linked to RPLR will be at 12.75% and for fixed rate loans the interest rate is down to 13.25% from the earlier 13.5%.
HDFC (FY99 Total Income Rs 17.5 bn) is the largest housing finance company in India with a 55% market share. HDFC operates 41 offices and has a field force of more than 42,000 commission agents who mobilize retail deposits.
On the loan slabs front HDFC has merged its four loan slabs into one. These were: loans upto Rs 10,000, Rs 10,001-Rs 1 m, Rs 1 m to Rs 1.5 m, Rs 1.5 m to Rs 5 m. Also the upper limit for housing loans has been raised to Rs 10 m. This has been done mainly to increase the comfort level of customers. As a result of the merging of slab categories, the interest rates on small loans upto Rs 10,000 have gone up by 75 basis points for fixed rate loans and by 25 basis points for floating rate loans. Earlier the interest rate for fixed rate loans upto Rs 10,000 was 12.5%. The new rates of interest will apply to all new loans and loans which are approved and not yet disbursed.
HDFC feels that its margins will not be affected as its cost of funds has come down to 11.25% in the past few months from 12.5% - 13.5% earlier. As the interest tax of 2% was earlier included in the rate charged for housing loans, HDFC plans to pass on the reduction of interest tax to consumers. However it is not clear whether this interest tax cut would be applicable only to new loans or also to existing loans.
As a significant amount of their loans falls into less than Rs 1 m category and the rate cut is only 25 basis points in this category, the above rate cut will not have a big impact on the margins of HDFC. However this rate cut will trigger off rate cuts on housing loans in the banking and finance sectors. It will also provide an impetus to individuals who are keen on taking new housing loans especially for those who want to take a Rs 1 m loan and above for a 15 year period. Now HDFC will charge them 13.25% as against the earlier rate of 15%, a reduction of 175 basis points.
Also as the rate between the fixed rate and floating rate is only 50 basis points, it would result in many individuals switching to the variable rate loan. This will help HDFC to position this type of loan in competition with the variable loans that many Indian and foreign banks have been offering. As the rate is adjustable, incase deposit rates go up in future they will be able to pass on the increase in cost to customers.
HDFC has always been a favorite of analysts and fund managers as it has an excellent asset quality and a good management. The recent increase in FII limit from 30% to 40% will be beneficial to HDFC as the FII limit of 30% was exhausted for them.10
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