The first turn in the interest rate cycle in 57 months, which should improve the growth runway ahead of housing finance companies (HFCs)
FinTech BizNews Service
Mumbai, February 7, 2025: Sanjay Malhotra, Governor, Reserve Bank of India, announced the decisions of the MPC on Friday.
Commenting on the Monetary Policy, Subhasri Narayanan, Director, Crisil Ratings, said: "Friday marked the first turn in the interest rate cycle in 57 months, which should improve the growth runway ahead of housing finance companies (HFCs). For home loan borrowers, the 25 basis points cut in the repo rate should translate to better affordability.
Profitability of HFCs could, however, see some impact. Around 70% of borrowings of HFCs are either on fixed-rate or linked to the marginal cost of funds-based lending rate (MCLR). These may not re-price immediately as MCLR adjustments typically take place with a lag. On the other hand, almost all loans disbursed by HFCs are on floating rates, which would put pressure on the net interest margins (NIMs) of lenders when interest rates fall.
What could be a partial mitigant is that a substantial portion of the floating-rate loans disbursed by HFCs are linked to the prime lending rates (PLRs) of HFCs. In the absence of a benefit on the borrowing cost side, PLRs may not see too much of a downward movement.
The extent of impact on NIMs, however, would differ based on the customer segments being served by the HFCs. HFCs catering to the prime segment, may see a relatively higher impact on their NIMs because of competitive pressures, especially from banks. On the other hand, HFCs catering to the affordable segment should see a more muted impact on NIMs given the lower elasticity of demand to interest rates in that segment. "
