By Deo Shankar Tripathi
How home loans are charged by banks and housing finance companies is a pertinent question. If you look at banks, most of public sector or private banks normally cater to the formal segment with regards to home loans. Formal segment means, the property chosen by the customer has to be formal and by reputed builders, and at the same time, the customer has to be an income tax payer with all relevant documents. When the customer belongs to the prime sector and the property is also prime, then most of the banks charge an interest rate in the range of 8.4% to 9%.
If you come to a housing finance companies, those housing finance companies which are lending within this prime segment of customers and in the affordable segment, they are lending in the range of Rs 25 lakhs to Rs 45 Lakhs. These customers are also MIG(Middle Income Group) customers and mostly have all the relevant documents available with them and there’s no concern on assessment of income and all. In these cases, housing finance companies also charge an interest rate similar to the banks with hardly about 10- 15 paisa over the banks’ rates because of speed in decision and other value adds.
Now, if you come to the affordable housing finance companies, particularly those housing finance companies which are lending to low income segment and economically weaker sections, here the challenges are in documentation. Income documents are not available; there are no income proofs of the customers. Lower income levels and continuity of income also pose big challenges. But this segment is normally the self-users of the house and constitutes a very large segment of the country’s housing shortage. The affordable housing finance companies are doing a great job in providing loan to these segments which are otherwise are not able to access the main banking systems as well as main HFCs who are operating in the prime segment. In this case, the affordable housing finance companies have to factor in the risk premium in the interest rate; their interest rate ranges from 11% to 13% depending upon profile of the borrower and the properties they are going to buy. Since their loan requirement ranges from Rs 5 Lakhs to 15 Lakhs, it doesn’t make much difference to them if rate of interest is 1% or 2% higher. For them, getting credit is more crucial than looking for interest rate.
Let me be very clear that there are three different segments; prime segment- where the risk is very minimum, are charged very low interest. Then there’s is mid segment where income proof is available but sometimes the property is from Gram Panchayat and similar – there, rate of interest will be 1% -1.5 % higher than the prime segment interest rates and third category is economically weaker section and low income segment – where there is call to be taken on the customer and his income is through rounds of personal discussions, the property also falls under Gram Panchayat area etc. Here, the interested rate will be roughly about 2.5 % over the normal banking interest rates which is applicable for prime segment. That is how interest rate operates in the country.