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Commentary

HDFC Ups RPLR to 15%

(Thanks to @Work_ant for mentioning this)

HDFC increased its Retail Prime Lending Rate (RPLR) to 15% yesterday – see pic below – , up 75 basis points (0.75%) from December 1. This follows an increase in RPL increase of 0.5% on September 1.

HDFC Ups RPLR to 15%

(Excuse the horrific graphic skills)

They’ve also stopped their teaser home loans – offered at 8.5% until March 2011, and 9.5% till March 2012, with a floating rate thereafter. Typical “thereafter” rates were RPLR minus 5% (4.75% to 4.5% advertised, but many have negotiated to 5%)

That means if interest rates stay where they are, home loan buyers will end up paying 10% on their home loans post 2012, and further increases till then will hurt them more.

To give you an idea, imagine a Rs. 50 lakh loan taken in October 2010.

The 8.5% teaser rate would involve an EMI of Rs. 43,400 till March 2011.

If you took the loan in October, you’d have paid 6 EMIs till March 2011. That leaves a balance of 49.5 lakhs, which takes the EMI up to Rs. 46,500 in 2011.

In 2012, the rate resets to, say, 10%. That takes the EMI up to 48,100 – with another 18.5 years remaining. That means EMIs go up 1.1x from current. Manageable, one might think – a 10% hike is less than inflation, currently.

But if the rate went up to 12% effective (RPLR went to 17%, say) – the EMI will be 54,500, which is 125% of the current payment. Given that there is no restriction on RPLR – HDFC can set what it wants – there is no reason to assume that rates will remain in sane boundaries. As RBI raises rates, money gets scarce, and the cost of borrowing of an NBFC like HDFC goes up, and they will raise rates accordingly.

You want to know how expensive money is? RBI conducted an auction today for T-Bills – the safest form of debt, since it’s government guaranteed. The 91 day T-Bill sold for 6.94% and the 364 day for 7.27% (all annualized, btw). That’s what the government will pay to borrow, for less than a year. And the 10 year T-Bond rate is 8.11%, and the 30 year, 8.43%. With the spread that small, we’re speaking of a very flat yield curve, and the rule of thumb is that financial institutions make loads of money on a steep yield curve (they borrow short term and lend long term) but not so much when the curve is flat.

It seems 27% of HDFC’s loans are in the teaser rate scheme. That’s more than 25,000 cr.  – which means if interest rates stay high, the reset rates will hit these consumers hard.

Since they’ve stopped teaser loans, all new floaters will likely be at 10% or more. How much that will help offtake is something time will tell – but it is likely to hurt sales. Even then, I think the stopping of teaser loans is good – there is some level of systemic risk such loans introduce.

Disclosure: No holding in HDFC.

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