New foreclosure rules can hit NBFC profitability: Report

The Reserve Bank of India's new draft foreclosure guidelines for products like home loans, loans against property and business loans to small and medium enterprises could increase competition among lenders and impact profitability from these products, according to a report by IIFL Capital.

Floating rate retail loans against property, small business, and SME loans, which constitute about 5% to 25% of assets under management (AUM) of non-bank lenders and housing finance companies, are most at risk as customers can switch their loans to lower rates, as is presently allowed in the case of home loans.

"Better-rated NBFCs having lower cost of funds should be able to partially offset it by increasing the share of more granular and higher-yielding customers through balance transfers from smaller peers. Over the medium term, this can also increase the competitive intensity for fixed rate non-housing loan book of affordable housing finance companies as large NBFCs seek to compete on rates," IIFL Capital said.


The proposed rules will give borrowers more flexibility in repaying their loans without extra costs.

On Friday, RBI proposed to waive the pre-payment penalties and foreclosure charges for retail borrowers and small businesses in a draft circular to lenders.

The threshold for SME borrowers has been set at ₹7.5 crore. The RBI said lenders should permit foreclosure/ pre-payment of loans without stipulating any minimum lock-in period. The banking regulator also said that if lenders levy foreclosure charges or prepayment penalties, it must be in accordance with a board-approved policy.