The Reserve Bank of India's proposed changes to loan interest-rate rules could significantly affect housing finance companies' pricing strategies. According to Kotak Institutional Equities, the new framework could reduce pricing flexibility for large prime housing finance companies that currently use an internal prime lending rate (PLR) and offer home loans at a discount to the benchmark. Under the proposed structure, floating-rate loans would have to be priced above the benchmark, which could narrow the difference between rates offered to new and existing borrowers. As reported by Kotak, the new regime (MCLR+) will take away the flexibility that lenders currently have under the 'PLR minus' model, making it particularly negative for HFCs with low spreads.
The impact on different housing finance segments varies significantly. As reported by Kotak, large HFCs in the prime housing segment, particularly those with low spreads, could be negatively affected as the new framework may reduce the flexibility they currently have under the 'PLR minus' model. However, affordable housing finance companies are expected to face lower impact as they generally have higher gross spreads and offer loans at a substantial spread over their cost of funds. During falling interest rate cycles, HFCs may link prime home loans to external benchmark-based lending rates (EBLR) to remain competitive. Notably, Kotak reports that EBLR would not be mandatory for NBFCs and HFCs under the proposed framework, reducing concerns over their shift to external benchmarks.
The new framework could significantly accelerate rate transmission to non-banking financial companies. According to Kotak, the shorter reset period of three months for floating-rate loans could have a broader impact on NBFCs, as they have significant borrowings from banks linked to the marginal cost of funds-based lending rate (MCLR). Many of these borrowings are currently repriced annually, but under the proposed framework, they could be repriced every three months, allowing changes in bank lending rates to be passed on to NBFCs more quickly. This accelerated rate transmission mechanism could fundamentally alter the cost of funds for NBFCs operating in the housing finance sector.
The RBI's draft directions seek to bring interest-rate practices across regulated lenders in line with each other. As reported by Kotak, the proposed guidelines are expected to come into effect from April 2027, giving lenders time to prepare and comply with the new framework. Existing floating-rate loans would have to shift to the revised framework by April 1, 2029, with the proposals including resetting floating-rate loans within a maximum period of three months. The framework aims to standardize interest-rate practices across all regulated lenders, ensuring consistency in pricing mechanisms and rate transmission practices across the financial sector.
