HDFC holds turf amid SBI attack

State Bank of India’s (SBI) special home loan scheme may have scared its private sector competitors somewhat, but it hasn’t quite propelled the bank ahead of them yet.

India’s largest lender has sure attracted a lot of attention by offering loans to home buyers at incredibly low rates. The 8% per annum SBI charges on any home loan for the first year is the lowest in the industry. It also gives loans up to Rs 50 lakh at 8.5% for the second and third years and has even made the discounted rates applicable for high ticket loans of over Rs 75 lakh. To the chagrin of competitors, SBI has also cut the floating rate beyond the third year, offering the floating home loan rate at 2.75% below the prime lending rate (PLR) higher than the 1.50% discount it was giving customers below PLR.

All the same, at the end of the fiscal first quarter, the privately held Housing Development Finance Corporation (HDFC) remained the clear leader in the home loan market, on all parameters.

Take outstanding loans. SBI’s outstanding home loans increased to Rs 57,513 crore in the quarter ended June from Rs 46,370 crore at the end of June, 2008. HDFC swelled its pie to Rs 87,045 crore from Rs 77,327 crore over the same period.

In terms of loan approvals, HDFC approved loans worth Rs 12,259 crore during the quarter, almost double SBI’s Rs 6,550 crore, though the gap narrowed to Rs 5,709 crore from Rs 6,296 crore a year ago.

In fact, going by analysts, SBI can never quite catch up with HDFC in home loans because unlike the latter, home loans are not the bank’s core business.

“SBI’s home loan portfolio was and remains 10% of its total loan portfolio because it has other things to do like auto loans, personals loans and of course corporate loans,” said an analyst with a private brokerage.

Also, the fact that HDFC has better doorstep service and its administration is well equipped to acquire and retain customers makes it more prepared.

In fact, analysts believe such steep discounts are likely to erode SBI’s profits because even though it continues to get deposits they are not as cheap as these loans.

Vaibhav Agrawal, vice-president research, banking said SBI is still paying about 7.5% for its fixed deposits. “Most of these deposits are going to government investments or home loans and now even the flight of low-cost deposits from private to public sector banks has dropped so it doesn’t make sense,” he said.

Agrawal believes SBI is not going to make enough revenues to make this scheme successful. “Given the huge increase in volume of loan applications, the risk that the quality of loans may get compromised can also not be ruled out,” Agrawal said.

Some analysts feel SBI’s aggression has run its logical course already. According to them, the bank was flush with funds following the special deposit schemes it ran last year and it made sense to lend it out at 8% rather than park it with the Reserve Bank of India at the repo rate of 4%. But that’s no more the case now.

Also, someone who has taken a loan at 8% may find it difficult to service it when the rate goes up to 11% on a later date, said an analyst, hinting that the bank was taking on unnecessary risk.

All this while, HDFC has been focusing on fundamentals. At the risk of appearing complacent, HDFC has been focused on bottom line growth and equity profile, Gautam Mehta, banking analyst with KR Choksi said.

But of course, HDFC has been no less rattled by SBI’s home loan drive. HDFC chairman Deepak Parekh has come out against the bank’s schemes more than once. Earlier this month, Parekh said the differential rates offered by SBI could lead to a ‘subprime’ like situation later.

“We are seeing some variations of teaser type housing loans being offered. The lure of low interest rate at the start of taking a housing loan is enticing. But are customers being made aware of future implications of this?” Parekh asked.