HDFC Ltd chairman Deepak Parekh highlighted the challenge for housing finance companies to retain clients amid low interest rates offered by several banks and increasing loan amounts.
“It would be a great comfort to all HFCs if this issue is addressed,” Parekh said in a letter to shareholders.
“Another delicate point for HFCs is customer loyalty. Lenders are likely to lose their existing customers to other players who often attract them with lower interest rates or increased loan amounts. Since there are no prepayment penalties on variable rate loans, a lender can repossess a home loan effortlessly, ”Parekh said in a letter to shareholders.
Balance transfers only transfer assets from one actor to another, he said, adding that it does not increase home loans or home ownership at the system level.
“Still, this is normal in a competitive business landscape,” Parekh said, noting that onboarding a home loan client takes a lot of effort and also comes with costs.
Other regulatory issues
In his letter, which is part of HDFC’s 2020-21 annual report, Parekh also highlighted other regulatory issues, but said these were his personal opinions.
Despite differences in the interpretation of regulations, Parekh said that non-bank financial companies, including HFCs, follow Indian Accounting Standards (IndAS), which are still not aligned with prudential guidelines.
“This leads to differences of opinion between inspection teams, regulated entities and even auditors,” he said, adding that it might be prudent to resolve these issues as soon as possible.
He also said that the insurance loan given to a home loan client should be considered part of a home loan and allowed to be classified accordingly.
“Currently, an insurance loan granted to a housing loan borrower is considered a loan other than housing. Insurance is voluntary for a mortgage borrower, ”he said.
Parekh added that the current regulatory framework could have the unintended consequence of penalizing an HFC for maintaining excess liquidity.
“Greater amounts of cash are held by HFCs as a precaution,” he said, adding that a minor adjustment that could exclude excess cash balances from total assets to arrive at prescribed limits would greatly help HFCs.
Parekh also remained optimistic about demand for home loans despite the resurgence of Covid infections.
“Despite the economy shrinking by 7.3% in 2020-2021, the demand for home loans has exceeded all expectations. Going forward, the risks of recurring waves of infections may lead to temporary setbacks, but the inherent demand for home loans remains stronger than ever, ”he said.