HFCs to see higher credit growth

The distinction between the business peripheries of banks, housing finance companies and NBFCs has got increasingly blurred over the past couple of years, with each giving stiff competition to the other across all segments of retail and corporate finance.

Housing Finance Companies (HFCs) and Non Banking Financial Companies (NBFCs) have come a long way from the era of concentrated regional operations, lesser credibility and poor risk management practices to highly sophisticated operations, pan-India presence and, most importantly, an alternate choice of financial instruments.

NBFCs are now recognized as complementary to the banking system capable of absorbing shocks and spreading risks at times of financial distress. The RBI also recognises them as an integral part of the financial system and is trying to improve their credibility in the financial sector.

Budget Measures

	Leasing and hire purchase to be treated on par with loan transactions and interest and installment of principal amount to be abated in calculating value of the service.
	Tax exemptions on interest paid on home loans to continue.

Budget Impact

	The governments thrust on early completion of infrastructure projects and the commitment to consider new projects (e.g. the metro rail projects) will necessitate private participation and thus, prove to be beneficial for players like IDFC.
	Leasing and hire purchase companies are expected to witness higher credit growth on their being treated at par with financial institutions (into lending business).
	Housing Finance Companies are expected to witness higher credit growth on the back of continued tax sops.

Sector Outlook

The budget measures are expected to augur well for the housing finance companies and improve their credit disbursals. Also, focus on infrastructure lending will provide a higher impetus to the growth of the sector.

Industry Wish List

	Maintain the tax incentives on housing loans.
	Sec 80IB to be amended to permit real estate developers to avail benefit under section 10(23G)

Budget over the years

Budget 2003-04	Budget 2004-05	Budget 2005-06

Tax exemption on interest on housing loans maintained at Rs 150,000 per year. Tax breaks on specified housing projects extended till 2005. Reduction in the interest rates on all small savings schemes by 1%.	Stress on the rural housing sector and increased allocation for Indira Awas Yojana by Rs 5.3 bn to Rs 22.5 bn. Revised norms of repayment of rural housing loans by banks so that installments coincide with crop cycles. Tax exemption on interest on housing loans maintained at Rs 150,000 per year.	Encourage trading of mortgage-backed securities. Tax exemptions on interest paid on home loans to continue. The allocation to 'Indira Awas Yojana' (flagship rural housing scheme) increased from Rs 25 bn in the current year to Rs.27.5 bn in BE 2005-06. About 1.5 m houses to be constructed during the next year.
[Read more on Budget 2003-04]	[Read more on Budget 2004-05]	[Read more on Budget 2005-06]

Key Positives

	Tax incentive on housing loans: The tax incentive allowed by the finance ministry on housing loans in the previous budget propelled incremental credit offtake in the mortgage loans segment bringing the mortgage loan to GDP ratio to 3% from the erstwhile 2%.
	Tax benefits to FIs: The finance ministry proposed amendments in the tax laws to offer tax breaks to financial institutions (FIs) merging with banks (with retrospective effect). This was beneficial to FIs that have got converted to banks (IDBI and the like).
	Conversion into banking entity: The RBI has allowed NBFCs with a good track record and net worth over Rs 2 bn to convert into a commercial bank. However, the number of licenses to be issued may be restricted to two or three of the best acceptable proposals. Conversion into banking entity will enable the FIs to access low cost deposits and improve their margins.
	90 day NPA norm: Housing Finance companies have shifted to the 90 day norm of accounting for NPAs which has brought their risk appraisal system at per with that of banks.

Key Negatives

	Higher risk weightage: The risk weightage on mortgage loans has been increased to 125%, which has additionally burdened the capital adequacy ratio of HFCs.
	High borrowing costs: High cost of borrowings to housing finance companies (HFCs) and high stamp duty dampens growth rates. HFCs are also not yet given 'Universal Banking' status for offering wholesale and retail finances under one roof.
	Interest rate dampener: The interest rate movement in the short term is likely to be with an upward bias. Although a marginal hike will not trigger any sensitivity, a movement beyond 100 basis points may dampen incremental offtake.
	Growing competition: NBFCs as a class do not offer any products that are distinct from what the banks are capable of offering. NBFCs were historically strong in the retail and vehicle finance segment and they leveraged on local relationships to grow their business. However in the last 3-4 years banks have aggressively taken away market share both in the retail as well as the vehicle finance segment.

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