As mortgage market heats up, mortgage finance companies see spread pressure

As mortgage market heats up, mortgage finance companies see spread pressure

The Indian mortgage market is experiencing intense competition with banks and non-bank finance companies vying for a share of the safest credit segment. This, combined with the benevolent interest rate regime, is starting to put pressure on the spreads that housing finance companies (HFCs) are earning.

According to analysts at Nomura Financial Advisory and Securities India Ltd, the progressive spreads of HFCs have narrowed sharply to 125 basis points in the past two months. A basis point is equal to one hundredth of a percentage point. Much of this can be attributed to the rise in bond yields which has made borrowing expensive for mortgage lenders. Ergo, with the increase in the cost of borrowing, spreads have narrowed.

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Sovereign bond yields have jumped nearly 50bp since January and the effect is also visible on corporate bonds. Government bond yields are unlikely to subside in the coming months. The Reserve Bank of India (RBI) has also indicated that it will gradually normalize liquidity. In other words, the excess liquidity would shrink. This means less funds available to invest in corporate bonds. HFCs are big borrowers through tenures in the corporate bond market.

Another factor has been the benevolent interest rate regime. The price of the additional home loans is spread over the repo rate which has been reduced by 115 basis points over the past year. Even on loans where the price is always less than …

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