Pre-payment penalty ban hits housing finance companies stocks
Shares of housing finance companies fell in a weak market on Thursday on concern the regulatory move to ban these firms from penalising pre-payment of loans would affect their profits. But analysts said such worries are stretched as revenues from pre-payment of loans contributed only marginally to their earnings.
HDFC fell 4.3%, Dewan Housing dropped 2% and LIC Housing Finance dived 6.4% on Thursday. The Sensex ended 0.9% lower after cutting early losses. Investors are worried that the ban on pre-payment fee would squeeze earnings on two fronts: the impact of loss in income from such charges, and the impact due to higher early loan closures.
“The market is reacting to worries that borrowers will shift between banks looking for cheap interest rates. But this type of interest rate arbitrage is not seen in the Indian market,” said Rajat Rajgarhia, head-institutional research, Motilal Oswal Financial Services.
Penalty from pre-payment of loans contributes an average of 2% to the revenues of HFCs, said an analyst with a local broking firm. Housing loan companies charge nearly 4% of the opening balance at the beginning of the financial year as penalty. Sector regulator NHB sees this as a deterrent for customers to shift between banks that offer cheaper interest rates.
“There will be hardly any impact on earnings of housing finance companies as pre-payment charges are a very small part of income,” said Vaibhav Agrawal, analyst at Angel Broking. “Tight interest rates among different lenders, especially larger ones, will lead to negligible loss of customers. It’s like how mobile number portability led to very little churn among different telecom providers,” he said. Agrawal said he won’t change his earnings guidance for housing finance stocks under Angel’s coverage, following the NHB directive.
“While there will be very little change on the financials of these companies, some business strategies will have to be revisited,” said Rajgarhia “They will need to realign products and rate structures,” he said. In October 2010, NHB banned levies on all pre-payments made from a debtor’s “own sources” – sources other than loans from other banks. However, Wednesday’s circular extends this to all floating rate loans irrespective of the source of pre-payment. Fixed rate loan pre-payments will continue to be charged unless paid back from the borrower’s own sources.
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