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HDFC rate cut to boost business volumes - Views on News from Equitymaster
 
 
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  • Aug 31, 1999

    HDFC rate cut to boost business volumes

    According to newspaper reports, Housing Development Finance Corporation Ltd. (HDFC) has decided to cut interest rates on loans by 100 basis points in its Rs 500,000 to Rs 1 m slab. The new rate, which stands reduced to 13.5 per cent, will be effective from September 1 1999.

    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.

    The profitability of finance companies such as HDFC depends upon the spreads - the difference between the cost of borrowing and the income from lending expressed as a percentage, they earn. Therefore, a decrease in lending rates will in all probability affect the spread. Although, the spread might still be comparable to that earned last year, mainly due to the decline in deposit rates or better utilisation of funds, it would be lower than what the company would have earned if it had maintained its lending rate at the higher level.

    HDFC could, however, more than make up for the decline in lending rates by generating business volumes and also by reducing its cost of funds.

    The Government has given a thrust to the housing sector by granting various tax sops for housing loans. According to HDFC, distribution of individual loans were growing at a rate of 40 per cent post budget. The corporate and business loan segment is too expected to grow at a rate of 25 per cent per annum. This kind of a jump in business activity could make up for the decline in the interest income per loan, thus boosting overall profitability.

    Moreover, with deposit rates having been marked down earlier on in the year, the cost of funds, too, is on a decline. Moreover, it is widely expected that the Reserve Bank of India will further ease the monetary condition, and thus the prevailing interest rates, in the Indian economy. This would further shore up the profitability, the spreads, of the institution.

    The decision to lower rates could trigger an industry wide rate cut. This will neutralize the advantage that HDFC could have gained. Overall, however, the industry will benefit as business volumes increase on account of the lower borrowing costs.

    Market View:

    The stock has always been a favorite of analysts and fund managers as it has an excellent asset quality and a good management. The FIIs have already exhausted their 30% investment limit in the company.

     

     

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