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R.Y. Narayanan

COIMBATORE, Feb. 6

THE housing finance major HDFC, though relatively late in introducing the monthly rest option for its home loan customers, a concept which its rivals used as a marketing tool, has now chosen to show greater thrust on it, if its latest interest rate restructuring is any indication.

It has also come out with a `loyalty programme' for its existing and past borrowers by offering an attractive interest rate on any new loan that they may source from it which may be at a discount to the market rate.

HDFC's focus seems to be on vigorous promotion of the concept of Adjustable Rate Home Loans (ARHL), otherwise known as Variable Interest Rate home loans and on monthly rest (simply put, calculation of outstanding principal amount of the loan at the end of every month after adjusting the principal amount from the EMI rather than at the end of the year).

Borrowers seem to have readily lapped up this concept because of sustained campaign by the recent entrants into the housing finance business, mainly new generation banks like ICICI Bank and old warhorses like State Bank of India (SBI) espousing their relative cost advantage compared to loans on annual rest.

For long HDFC has been following the annual rest concept before introducing monthly rest some months ago. HDFC sources claim that their variable interest rates are `really variable' unlike many banks which do not re-set automatically the loan every time interest rate changes.

Apparently, the concept of long term planning (borrowing) has yielded way to short term planning and people want to plan for the near future and HDFC wanted to `play ball' with such an approach.

In the latest announcement regarding interest rate cut announced by HDFC, it is the loan under monthly rest, particularly under the ARHL that has seen the maximum cut whereas annual rest option has received a small reduction.

In fact the HDFC Press release announcing the interest rate cut, posted in its Web site www.hdfc.com only states that "rate of interest under Annual Rest option has also been suitably reduced".

But in case of monthly rest, there has been a substantial cut in interest rate- ranging from 0.50 per cent to 0.75 per cent. Under the ARHL, the interest rate under annual rest for all the three terms — up to 5 years, 6-10 years and 11-20 years — has been kept constant at 10 per cent.

But under monthly rest, the interest rate up to 5 years has been brought down to 9 per cent from 9.50 per cent, for 6-10 years it is 9.25 per cent (10 per cent) and for 11-20 years, it will be 9.75 per cent (10.50 per cent).

Even for the monthly rest scheme, the interest rate under variable interest option is 0.25 per cent less compared to the same scheme under fixed interest option for all the three loan tenures.

Interestingly under the fixed rate option, while the interest rate for both annual and monthly rest for the term up to 5 years is the same at 9.25 per cent, for the other two terms, the new interest rate for annual rest is 0.25 per cent less compared to monthly rest which may neutralise any advantage due to monthly interest calculation.

HDFC sources say that the new focus is on promoting the concept of ARHL and the monthly rest concept rather than fixed rate and annual rest products. These were pure vanilla combinations that met the expectations of the home loan borrowers at present. The people seemed to plan for the near term rather than take a long-term view and the company has to tailor its products accordingly.

But there are some who view that such short term planning by the people may work against them in the long run in case interest rates harden and begin an upward march.

This could happen because of two factors — inflation and picking up of credit demand from industries that may signal upward revision of interest rates. In such a scenario, the variable interest rate customers would have to face upward revision in interest rates.

HDFC has also announced that the it is introducing a three month re-set review cycle under its ARHL scheme for new customers as against the existing 6 month re-set review cycle. This would ensure that any change in interest rate for the ARHL optees is effected much quicker than earlier.

But the issue to be borne in mind is that whenever a customer chooses to shift from one option to another — such as annual rest or monthly rest and fixed rate loan or ARHL, one has to pay a processing fee of 0.5 per cent of the outstanding loan amount, which adds up to the cost.

But with the consistent fall in interest rates in the past few years — from around 13.5 per cent to below 9 per cent for home loans — people seem to be hardly complaining!

HDFC has also announced that it has introduced a` loyalty programme' for its existing and past loan customers by offering `attractive rates on new loans availed by them'. This new rate is expected to be at a marginal discount to the usual rate though it has not been indicated as to what would be the percentage of discount.

The home finance giant, which has found the new entrants nibbling at its hosing loan market share, has entered into an arrangement with more than 500 top corporate houses across the country to offer `special schemes' for their employees.

Apart from working out schemes with leading developers to provide HDFC customers value added packages, HDFC has hinted that it is also into the loan take over game under its `balance transfer scheme'.

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