ICICI to fund home loans up to Rs 20 lakh

Keeps low-risk priority lending with itself, leaves big financing to arm.

ICICI Bank, the country's second largest mortgage lender, has decided to split its home loan business between the bank and its wholly owned subsidiary, ICICI Home Finance Company.

The bank plans to finance home loans only up to Rs 20 lakh, which qualify as priority sector lending. Home loans above Rs 20 lakh would be provided by ICICI Home Finance.

"ICICI Bank will focus on home loans with a ticket size of Rs 20 lakh, which qualifies as priority sector loans. The bank will keep the priority sector loan business with itself. Large ticket-size loans will be booked by ICICI Home Finance,'' said Rajiv Sabharwal, senior general manager, ICICI Bank.

Housing loans up to Rs 20 lakh carry a lower risk weight of 50 % for capital allocation purpose. Banks are required to direct 40 % of their loans towards priority sector, including agriculture and small-scale industries. Larger ticket-size loans carry a higher risk weight of 75 %.

The bank has recently received approval from the Reserve Bank of India (RBI) to infuse capital into the home finance company. Following this, the bank has invested Rs 500 crore in the company, taking the net worth of the company to Rs 800 crore at the end of December 2007.

ICICI Bank is going ahead with a separate subsidiary for home finance, while public sector banks such as State Bank of India, Canara Bank and Punjab National Bank are considering merging their subsidiaries with themselves.

Raising long-term finance is a challenge for banks. The home finance company will have access to different sources of capital, which will be diversified and long term in nature. The home finance company will also be able to set up branches in convenient locations, said Sabharwal.

Housing loans up to Rs 20 lakh form about 60 % of the banks' mortgage portfolio. The average home loan ticket size is around Rs 10 lakh.

The total assets of the housing finance company stood at Rs 4,610.78 crore at the end of March 31, 2007. In the third quarter of 2007-08, the home finance company booked less than Rs 1,000 crore of home loans.

ICICI Bank's home loan book grew 12 % year-on-year to around Rs 60,000 crore at the end of December 2007. If the disbursement done at the end of the quarter in the home finance company were to be included, the growth in the home loan portfolio would be around 13-14 %.

This is a deceleration from the elevated levels of 40 % year-on-year growth that the bank had reported in its mortgage lending portfolio in the previous year.

Housing finance companies are required to maintain a capital adequacy ratio of 12 %. However, while banks have to keep aside Rs 32.5 of every Rs 100 raised to meet cash reserve ratio and statutory liquidity ratio requirements, non-deposit taking housing finance companies are not subject to these requirements.

Housing finance companies are regulated by the National Housing Bank set up by the RBI. While banks can issue infrastructure bonds to raise long-term resources, HFCs can raise long-term funds through issue of bonds and debentures.

HFCs also do not need to obtain licences for opening of new branches or office. They are only required to inform the NHB of their intention to open a new branch or office.

ICICI Home Finance Company was incorporated as a 100 % subsidiary of ICICI Personal Financial Services, the bank's one-time consumer banking arm in May 1999. Since May 2002, ICICI Home Finance has become a wholly owned subsidiary of ICICI Bank.

The bank charges 12 % interest for home loans above Rs 20 lakh, which is 50 basis points higher than the interest on home loans up to Rs 20 lakh.