September 16, 2010: The National Housing Bank (NHB), the regulator for housing finance companies (HFCs), has deferred the implementation of base rate system for HFCs. Banks have already shifted to the base rate regime from July 1. The Reserve Bank of India (RBI) had asked banks to shift from benchmark prime lending rate system (BPLR) to base rate below which the banks cannot lend, thereby completely stopping sub-PLR lendings.

S Sridhar, chairman of NHB, who is also the CMD of Central Bank of India, said, “In our recent meeting with HFCs, we have decided not to implement base rate system for the housing finance companies now. We will watch the experience of the banks on the base rate to take a call on the issue later.”

A top official of a well-known housing finance company said the ongoing experience of the banks with base rate system seemed to be unsatisfactory. “The banks are facing a lot of problems now in managing their business. They are losing business to others. We don’t want to face a similar situation,” said the official.

LIC Housing Finance director & CEO RR Nair confirmed that there was a discussion on the impact of banks’ base rate system on housing finance companies. “It is also impacting the HFCs’ cost of borrowing. It is impacting our incremental cost of borrowing. As a result, HFCs are increasingly raising their prime lending rates. Although we have not yet raised rates, we would consider it after the end of the September quarter.”

NHB, after the RBI asked banks to shift to the base rate system, was toying with the idea of introducing the same for HFCs. Analysts have said over 50 per cent of HFC fundings comes from banks. If banks raise their base rates when they conduct their next round of review, the cost of funds of HFCs will be impacted. That will have a bearing on the decision of most HFCs.