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Same mechanism for loans, liabilities: HDFC may link rates to external benchmarks

Move to be discussed at next asset liability committee meeting to be held in two weeks.

, ET Bureau|
Updated: Sep 11, 2019, 08.49 AM IST
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“We would come up with external benchmark-linked loan products only when we are able to match the same mechanism on our liabilities side,” Keki Mistry said.
MUMBAI: Housing Development Finance Corp (HDFC Ltd), the country’s largest mortgage lender, is considering a plan to link interest rates to external benchmarks, although the Reserve Bank of India (RBI) hasn’t mandated this for housing finance companies (HFCs).

The home financier is looking to link both loans and liabilities as this will protect interest margins, HDFC vice chairman Keki Mistry told ET. For liabilities, it may engage in aggressive trades in interest-rate swaps, a market mechanism in which a trader exchanges fixed-rate payments for floating rates.

“We will still examine such loan products in our next asset liability committee (ALCO) meeting to be held in the next two weeks,” Mistry said. “We would come up with external benchmark-linked loan products only when we are able to match the same mechanism on our liabilities side.”

AUM Increases 13%
He pointed out the latest move on linking bank interest rates to external benchmarks does not apply to HFCs.

HDFC’s total assets under management rose 13% to Rs 4.76 lakh crore as of June 30. Home borrowers account for about three-fourths of the loans while construction finance, lease rental discounting and corporate loans make up the rest of the loan book.

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The company raises money through a combination of bonds, public deposits, overseas credit and vanilla term loans. The home financier meets nearly half of its fund requirement through debt securities. Public deposits form 31% of the borrowing book.

“Swapping part of our liabilities should be with external benchmarks to which all other HFC loans are linked,” Mistry said. “If we raise money via bonds we should be able to swap it.”

RBI Mandate
Last week, the RBI mandated that banks should link home, auto and micro, small and medium enterprise (MSME) loans to external benchmarks such as the repo rate, at which banks borrow shortterm money from the central bank, and treasury bills. The faster transmission of RBI rate action is the primary motive behind the move that will be effective October 1. The central bank has cut its policy rate by 110 basis points this year in a bid to push credit expansion to spur investment and help with economic revival. A basis point is 0.01 percentage point.

Banks face the threat of contracting interest rate margins if they only link assets to external benchmarks and not deposits. State Bank of India cut deposit and lending rates on Monday.

The No. 1 mortgage lender is better placed than some of its peers.

“HDFC is better placed with about 50% of borrowings linked to floating rates than LICHF’s (LIC Housing Finance)--about 22%,” said Emkay Global analyst Jignesh Shial in a note. “However, margin pressure on both companies is inevitable. We appreciate HDFC’s diversified asset and liability franchise, consistency in spreads, and healthy provision coverage that smoothen risks of any future defaults.”

According to the Emkay report, standalone lending for HDFC contributes 53% to the total value, providing further comfort. The lender continues to see rising credit demand from buyers looking for homes to stay in, as opposed to speculators. The government has set a target of Housing for All by 2022.

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