In its new move by National Housing Bank (NHB), the regulatory body for housing finance, pre-payment penalties are completely banned for the floating rate loans. There will no longer be any fee levied on floating rate loans towards the pre-closure of the loans. This rule would be applicable irrespective of the nature of source of funding for the pre-payment of the loan. Source of funding could be own sources (such as savings or loans from relatives) or loans from other banks. With respect to fixed rate loans, only borrowers who repay from their own pocket will be exempted from the penalty. In case borrowers shift to another bank or Housing Finance Company (HFC), the penalty will be applicable.
In another move by NHB, the regulator has also asked the 54 HFCs under its review to ensure that all borrowers pay the same interest rate, irrespective of when the loan was taken. Thus floating rates will now be uniform to both old as well as new customers with a similar risk profile. This is regardless of when they entered into a contract.
All these moves were projected in the media as a good gesture for the borrowers. It was like a cold wind for the borrowers who were feeling the brunt of the incessant key rate hikes by Reserve Bank of India (RBI). At the same time, it was taken as negative news for the housing finance companies. After all, this payment penalty was being used by the companies for their Asset Liability Management (ALM). At the same time, it was a source of revenue for the companies to the tune of up to 4% of total revenues. As a result, the stocks of these companies witnessed a selling pressure after the announcement made by NHB.
Are these moves really good for the borrowers? Would the HFCs be suffering in the long run? We really do not believe so. True, some customers would reap the benefits in the short term. However, this move by NHB has left the HFCs with risk of ALM mismatch. Who would pay for this risk in the long run? Only the borrowers. Now the HFCs are left with no choice but to build in pre-payment risks into the loan costs itself. This would only increase the cost of borrowings.
In India, we do not have a mature hedging market for interest rate risks. That would result into imperfect pricing for the risk. And at the end, the customers would be paying higher than warranted costs of risks.
What is the way forward? Now NHB should make policies to address the pre-payment risks. Otherwise, the HFCs would start taking steps to mitigate this risk. And in the long run, the entire community of borrowers may suffer.