HDFC jacks up home loan rates

Housing finance major Housing Development Finance Corporation (HDFC) has announced a 50 basis points hike in home loan rates in the coming week. One basis points is one-hundredth of one per cent.

Last week, ICICI Bank announced its intention to hike its home loan rates, by a similar margin, after a week. Post-Diwali many more home loan players are set to raise rates.

"The cost of fund is going up. We will go for a hike of 50 basis points on both floating and fixed loans across all maturities," Deepak Parekh, chairman, HDFC, said in Mumbai today. 

This is HDFC's first hike in floating rates after a gap of over four years. The last time it hiked its floating rate home loan was in August 2000 -- by 50 basis points to 13 per cent. Since then, there have been nine cuts.

Now, HDFC's floating rate loan is priced at 7-7.75 per cent, money market condition-linked fixed rate at 7.75-8 per cent and pure fixed loan 8.25-8.5 per cent, depending on the amount of loan and profile of the customer.

In August, HDFC hiked its fixed rate loan by 25-50 basis points and introduced the money market linked product.

Parkeh did not see any fall in demand for home loans as a result of the hike in rates. "Even a 1.00-1.50 per cent increase in rates will not dampen the growth in the housing sector," he said. However, he refused to spell out whether it is the beginning of a series of hikes in home loan rates.

HDFC will also increase its deposit rates, Parkeh pointed out. The rate hike is in the backdrop of rising yields in the government securities market, rising inflation and shrinking liquidity. "The five-year government bond yield has gone up by 250 basis points since the beginning of the fiscal year.

The overnight call rate is also up.

State Bank of India chairman AK Purwar last week said that home loan rates were likely to go up following the increased risk weightage banks have to apply on lending to housing.

Auto loan rates are also likely to see a rise. Other public sector banks like Union Bank of India, Punjab National Bank and Bank of India also might take a cue from State Bank of India and hike their rates.

With apprehensions of an asset bubble, the Reserve Bank of India bank in its mid-term annual policy statement 2004-05 increased the risk weight for banks' lending to housing from 50 per cent to 75 per cent. The new norms put housing finance companies at par with banks.

A bank has to provide Rs 6.75 for every Rs 100 that it lends to the housing sector while housing finance companies (HFCs) have to apportion Rs 6. The capital adequacy ratio requirement for a bank is 9 per cent while that of HFCs is 12 per cent.

Parekh said housing loan  companies have a higher capital adequacy ratio (12 per cent) and their value to loan ratio is lower than the banks. Hence, the National Housing Bank -- home loan regulator -- is unlikely to hike their capital requirement on the line of banks.