Home loan rates in the country have been reduced by major public sector banks but the housing finance companies (HFCs) complain of the high cost of funds and therefore refuse to cut down the lending rates.

The HFCs in the country are saying that the cost of funds is not moderating in any way because the banks are still charging them around 12% to 13% where as their average lending rate is lower than this rate. Thus the home loan rates charged by any housing finance company are higher than the rates charged by banks. Such as, interest rate of HDFC and LIC Housing Finance Company which jointly amount to 70% of the HFC market, is lying around 11.5% and housing loan rates charged by Dewan Housing Finance Company costs around 12% to 14%.

HDFC's Joint Managing Director Renu Sud Karnad said, "Our interest rates are a function of our cost of funds. We have always passed on the benefit of lower cost of funds to our customers and we will continue to do the same. As of now, we have not seen interest rates coming down even though RBI has taken steps to provide liquidity. The issue today is not of liquidity, but of credit and until it is made available, it would be difficult for anyone to bring down interest rates."

LIC Housing Finance Chief Executive Officer R R Nair said, "With banks cutting home loan rates, there is an expectation of rate cut in the housing sector, but our cost of funds still remains high. In the foreseeable future, there is no scope for reduction in lending rates."

The high cost of funds of the HFCs is distressing these companies' capacity to compete with PSU banks whose weighted average costs are almost 300 basis points lower than that of the HFCs. So the lending rates of HFCs are 50-100 basis points higher than those of public sector banks. However the PSU banks are lending at higher rate to the sector which are more prone to risk. An executive from a large PSU Bank said, "We are lending to NBFCs at about 13 percent, which will not come down as we consider it as a high-risk sector."

Industry analysis approximate that HFCs would comprise of over 40% of the housing finance market and even executives form these companies claim that HFCs share in the housing finance market would rise by 15% to 40% as compared to 25% in 2007-98.

In the view to support HFCs, National Housing Bank (NHB) recently raised the refinance rate to up to 12 % from around 9% but this also did not help the basis of HFCs. Even though the big guns of HFCs are able to uphold with the rising cost of funds, the smaller firms are finding it difficult to make their stand.