Home loan rates to stay low in medium-term: Icra

Interest on home loans is likely to remain low and the share of banks in the overall mortgage market is set to rise in the medium term while smaller banks and housing finance companies may be either marginalised or forced to exit, according to credit rating agency Icra.

"The lending rates are likely to remain low in the short to medium term, given the abundant liquidity in the system and the prevailing competitive pressures," an Icra report said.

Noting that HDFC, ICICI Bank, SBI and LIC Housing Finance accounted for over 60 per cent of the outstanding mortgage loans, it said the competition among lenders was expected to remain "intense" as banks increase their presence and compete with standalone housing finance companies.

Viewing "banks as serious competitors for housing finance companies " because of their established network and access to low cost deposits, Icra said the factors that were expected to hold the key to success for the mortgage players include the ability to match the service levels of the efficient players while controlling the operating expenses, maintaining asset quality and managing the interest risk effectively.

The report, however, said "lack of economies of scale is likely to marginalise some of the smaller banking and housing finance company players, or force them to exit the business altogether."

But the smaller players, which would be able to sustain growth, would either be bank subsidiaries or niche/regional players operating on smaller volumes, it added.

Icra said the organised mortgage loan demand would continue growing owing to fresh housing demand and more people becoming eligible for home loan due to general rise in income levels.

Citing that while borrowers preferred the variable rate option with changes in interest rates, Icra said fixed rate loans were equally popular.

It apprehended asset-liability mismatch for housing finance companies and said "although in the recent past, pre-payments of housing loans by borrowers, mainly on account of declining interest rates, have helped most housing finance companies correct the mismatch, the problem persists over the medium to long term."

The credit rating agency noted that contribution of funding through securitisation was still small at 3.7 per cent in relation to disbursement levels of the industry.

The development of securitisation market and the proposed initiatives of national housing bank on partial guarantees for long-term bonds of housing finance companies would help the housing finance players overcome the problem of raising long-term funds, it said.