NEW DELHI: Calling for ironing out of regulatory wrinkles, HDFC chairman Deepak Parekh has raised concerns about housing finance firms being able to retain customers as no prepayment penalty on floating rate loans is leading to other players luring away borrowers through lower rates and increased loan amounts.
Onboarding a home loan customer takes a great deal of effort and entails cost as well, Parekh said in his message to shareholders in the company's annual report 2020-21. He said that retention of customers is a niggling point for HFCs (housing finance companies).
"Lenders are susceptible to losing their existing customers to other players who often lure them through lower interest rates or increased loan amounts. As there are no prepayment penalties on floating rate loans, a lender can take over a home loan rather effortlessly. For selling agents who are not tied-agents, it is a win-win situation as long as they are getting paid a commission twice over the same borrower's loan," he said.
The chairman of the country's largest mortgage lender further said balance transfer of loans only shifts assets from one player to another, and it does not increase the loan or home ownership at a system level.
"The issue is that onboarding a home loan customer takes a great deal of effort and entails costs as well. But certainly, an endeavour to retain a performing customer which could entail a change in the rate of interest is not akin to a loan being restructured. It would be of great comfort for all HFCs to have this issue put to rest," he said.
He added that the company's individual loan disbursements performed well during FY21 and the demand pick-up was much faster than HDFC had anticipated in the latter part of the year. HDFC reported 3 per cent growth in its individual loan disbursements during the year.
Additionally, in the current environment wherein the COVID-19 pandemic has laid bare how fragile life can be, he said there can be no better protection for a borrower than home loan insurance and home insurance.
Equally, given the risks around climate change and abrupt weather patterns, home insurance becomes a key risk mitigant.
He suggested that insurance loan for a home loan borrower should be considered as an integral component of a housing loan and be permitted to be classified accordingly, as it protects both the customer and the HFC.
Currently, an insurance loan given to a borrower is considered as a non-housing loan. Also, buying insurance is voluntary for a home loan borrower. Parekh also pointed out the issues that are arising out of large amount of liquidity, saying the current regulatory framework "may have the unintended consequence of penalising a HFC for maintaining excess liquidity".
Larger amounts of liquidity are being held by HFCs out of abundant precaution. "But surely maintenance of higher liquidity should not become the hindering factor leading HFCs to recalibrate their housing and non-housing portfolios so as to meet the prescribed minimum threshold limits of assets in housing finance," he said.
He suggested that a minor tweak which could exclude surplus liquid balances from total assets to arrive at prescribed limits would go a long way in helping HFCs. Besides, the veteran banker also called for a level playing field in terms of same accounting standards.
That regulatory clarity helps minimise potential conflicts, he said, adding often there are differences in interpreting regulations.
Pointing out that non-banking financial companies (NBFCs), including HFCs, have been following the Indian Accounting Standards (IndAS), which are still not aligned with the prudential guidelines, he said this results in differences in opinions between inspection teams, regulated entities and even the auditors.
"Banks and insurance companies have not migrated to IndAS, but it has been three years since NBFCs have. While this isn't a level playing field, it may be prudent to at least resolve these open-ended issues sooner than later," Parekh said.