Rising NPA's may propel home loan rates: Crisil

Home loan rates may not rise if the industry can contain the non-performing assets (NPAs) at current levels. Otherwise, they could rise by 100 basis points, predicts the country's largest rating agency, Crisil, in its latest study.

"Overall profitability of mortgage lenders could come under pressure unless players raise rates. This is because incremental return on equity (RoE) is very low," stated Crisil in its study 'Mortgages: no escaping a rise in rates'.

In the case of banks, the RoE is at 12.1 per cent today against 22.02 per cent last fiscal. Housing finance companies (HFCs) have a lower RoE of 7.23 per cent (17.93 per cent). 
 

Financial ratios, per cent
	Banks	HFCs*
Net interest margin	3.16	1.54
Administration/processing fees	0.06	0.08
Operating expenses/assets	2.50	0.80
Credit cost	0.12	0.31
Tax/assets	0.21	0.11
Return on assets	0.39	0.42
Return on equity (today)	12.10	7.23
Return on equity (FY04)	22.02	17.93
*Housing finance companies                                     Source: Crisil

Housing finance majors "" Housing Development Finance Corporation (HDFC) and ICICI Bank "" are just two of the four entities, which have hiked interest rates on home loans by 50 basis points. IDBI Bank and Dewan Housing Finance have followed in the foot-steps of the leaders. While the rest of the industry has preferred to adopt a 'watch and wait' approach, Crisil's study estimates a 50-100 basis point increase in lending rates "to protect shareholder returns as portfolios grow."

Pressure on players to hike interest rates will be triggered by the fact that in last four years when interest rates were falling, housing finance entities reduced rates by 675 basis points since April 2000.

This was a sharp decline in rates compared to a 450 basis point fall in the yields on the benchmark 10-year government paper during the same period, stated Crisil.

Today even as 10-year yields have risen by 200 basis points, most housing finance institutions have left their rates unchanged. Those which have modified rates, have hiked them by just 50 basis points.

Banks are the largest financiers today with a market share of 60 per cent in terms of disbursements as compared to 27 per cent in fiscal 1999-00.

Growth in disbursements by banks has risen by an average of 74 per cent while that for HCFs has lagged behind at 21 per cent, said Crisil in its report.

"Banks had been eyeing high yields, which today are shrinking," said Crisil's analyst Geeta Chugh. With heightened competition, processing fees and administration charges have also been waived by many players, thereby further squeezing lenders' spreads, she added.

"The current low rates are unsustainable in the long run, and could push up by 50-100 basis points," stated Crisil in its study. However, it added that the increase could be lower if players are able contain NPAs. However, the increase in risk weightage on mortgages for banks will depress banks' RoE further, it added.

"The increase in risk weight will lead to an incremental capital requirement of about Rs 1,700 crore, with the impact on tier I capital alone being to the tune of Rs 1,100 crore," said Chugh.

The Reserve Bank of India (RBI) has hiked risk weightage on home loans by banks from 50 per cent to 75 per cent. By keeping NPAs on home loans at 0.78 per cent as in the case of developed markets like the US, RoE for banks can improve to 15.24 per cent and that for HFCs to 13.84 per cent, stated Crisil.

Crisil said that rising lending rates will not have much of an impact on mortgage delinquencies even in the scenario of a sustained rise in rates. Only players with low cost of funding and effective internal systems will be able to continue to grow and thrive. Others will see their roles getting redefined, it stated.