Base Rate and Impact on HFCs

1. Base Rate andImpact on HFCs 30th CEO’s Meeting of HFCs Presentation by Ms. Renu S Karnad Managing Director - HDFC September 7, 2010

2. Base Rate for Bank lending • RBI implemented Base Rate for bank lending w.e.f. 1 July 2010 • All categories of fresh loans/renewals to be priced only with reference to the Base Rate • Lending below the Base Rate not permitted except for staff loans, loan against deposits etc. • Base Rate comprises of banks’ cost of deposits/funds (in any tenor/tenors), plus adjustment of negative carry for reserve requirements, common overhead costs and profit margin • Mandatorily reviewable every quarter • Banks given time till December 2010 to change their benchmarks and methodology of calculating Base Rate

3. Base Rate for Bank lending • The loans based on current system of BPLR to run till maturity • Existing borrowers may switch to Base Rate, on mutually agreed terms • Base Rate for most public sector banks is in the range of 7.75% to 8.25%. (Base rate of SBI is at 7.50%) • Base rate for Private sector and foreign banks lower by 50-75 basis points • Banks can add tenor premium / credit charges and other such customer specific charges over Base Rate to determine their actual lending rates

4. Base rate of banks 8.00% Allahabad Bank Bank of Baroda Bank of India Canara Bank Central Bank of India IDBI Bank Indian Bank Oriental Bank of Commerce Punjab National Bank UCO Bank Union Bank of India 8.25% Andhra Bank Bank of Maharashtra Dena Bank Indian Overseas Bank Syndicate Bank United Bank of India Vijaya Bank 7.75% Corporation Bank Developmental Credit Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Travancore Federal Bank 8.10% South Indian Bank 8.75% Karnataka Bank 8.50% KarurVysya Bank 8.20% Punjab & Sind Bank 7.50% Axis Bank ICICI Bank Sinhan Bank State Bank of India State Bank of Indore 7.00% DBS Bank Dhanalakshmi Bank IndusInd HSBC Yes Bank 7.25% Citibank HDFC Bank Kotak Mahindra Bank Standard Chartered Bank of Nova Scotia 5.50% Bank of Tokyo Mitsubishi 4

5. Funding Pattern of HFCs • Major part of borrowings by HFCs is by way of bank term loans • Market borrowings of HFCs (excluding 3 large HFCs) is around 10% of their overall liabilities. Borrowing Profiles of All Borrowing Profiles of Mid - HFCs as on March 2010 Sized HFCs as on March 2010 (a compilation of 17 HFCs) (after excl HDFC, LICHFL, ICICI Home Fin) High Vulnerability of smaller HFCs on changes in the cost of bank loan funding 5

6. HFC’s Funding Pattern : FY 2009-10Bank Borrowings as a %age of Total Borrowings Note : Bank Borrowings includes Short-Term Bank Loans & OD Source: Compiled from Annual Reports of HFCs

7. Bank Borrowings by HFCs • HFCs borrowings from Banks are generally for short term (6 months – 1 year) and normally renewed thereafter • This enabled HFCs to take advantage of short –term rates while accessing medium-term funding from banks • HFCs also tapped refinance from banks under their Priority Sector lending requirements, which was at relatively cheaper rates • Post implementation of Base Rate, Banks are unable to lend below their base rates. The minimum rates charged by banks to HFCs is 8.00% to 8.25%

8. Concerns • Cost of funding for HFCs has gone up • Due to tight liquidity conditions coupled with RBI’s rate hikes, the rates of interest on other sources of funds have also risen besides the impact of higher Base Rates. • Volatility in Funding Costs • Base Rates to be reviewed quarterly, may lead to volatility in funding costs of HFCs – may not be able to pass on to customers as regularly • Home Loan rates not being revised by banks • Rates on home loans offered by banks remain unchanged post the introduction of base rate. • Base Rate for HFCs • HFCs do not have access to CASA and hence their Base Rates will be higher than those of Banks

9. Issues relating to Priority Sector Lending • In December 2009, RBI revised the guidelines for lending to Housing Finance Companies (HFCs) by banks under priority sector. • Under the new amendments, Banks are now required to link the tenor of loans to HFCs in line with the average portfolio maturity of loans. Banks are unable to lend to HFCs for longer durations. • Further, the special dispensation for refinancing of loans upto Rs 20 lacs qualifying as priority sector in case of loans granted by banks to HFCs has come to an end on March 31, 2010. Currently loans upto Rs. 5 lacs qualify for Priority Sector .

10. Suggestions Thus, need for additional / alternate sources of funds for HFCs • Housing may be accorded ‘infrastructure’ status to enable HFCs to tap funds through tax saving bonds. • HFCs may be permitted to access External Commercial Borrowings (infrastructure finance companies are being permitted to raise ECBs) • Limit of Housing loans qualifying as Priority Sector to be raised to Rs. 20 lacs or else • Permit HFCs to issue bonds and debentures which qualify as Priority Sector for the banks

11. Thank you