ICICI bank to keep low risk priority lending and gives big financing to HFC

ICICI Bank, the country’s second largest mortgage lender, is making plan to split its home loan business between the bank and its wholly owned subsidiary, ICICI Home Finance Company.

According to the plan the bank will be financing home loans only up to Rs 20 lakh, which qualify as priority sector lending. Home loans above Rs 20 lakh will be offered by ICICI Home Finance.

“ICICI Bank will focus on home loans with a ticket size of Rs 20 lakh, which qualifies as priority sector loans. The bank will keep the priority sector loan business with itself. Large ticket-size loans will be booked by ICICI Home Finance,’’ said Rajiv Sabharwal, senior general manager, ICICI Bank.

Housing loans up to Rs 20 lakh have a lower risk weight of 50 % for capital allocation purpose. Banks have to direct 40 % of their loans towards priority sector, including agriculture and small-scale industries. While larger ticket-size loans carry a higher risk weight of 75 %.

Recently RBI has approved banks home finance company. Following this, the bank has invested Rs 500 crore in the company, taking the net worth of the company to Rs 800 crore at the end of December 2007.

ICICI Bank private sector bank is moving ahead of creating a separate subsidiary for home finance, while public sector banks such as State Bank of India, Canara Bank and Punjab National Bank are considering merging their subsidiaries with themselves.

The biggest challenge for banks is to raise long-term finance. The home finance company will have search different sources of capital, which can be diversified and long term in nature. The home finance company will also be setting up branches in convenient locations, said Sabharwal.

The average home loan ticket size is around Rs 10 lakh. While Housing loans up to Rs 20 lakh form about 60 % of the banks’ mortgage portfolio.

At the end of March 31,2007 the total assets of the housing finance company stood at Rs 4,610.78 crore. In the third quarter of 2007-08, the home finance company gave out less than Rs 1,000 crore of home loans.

At the end of December 2007 ICICI Bank’s home loan volume grew by 12 % year-on-year to around Rs 60,000 crore. If the payment done at the end of the quarter in the home finance company were to be included, the growth in the home loan portfolio would be around 13-14 %.

This is a deceleration from the eminent levels of 40 % year-on-year growth which the bank had accounted in its mortgage lending portfolio in the previous year.

Housing finance companies are required to maintain a capital adequacy ratio of 12 %. Moreover, while banks have to keep aside Rs 32.5 of every Rs 100 raised to meet cash reserve ratio and statutory liquidity ratio requirements, while non-deposit taking housing finance companies are not subject to these requirements.

RBI has setup the National Housing Bank to keep check on Housing finance companies. Banks have the right to issue infrastructure bonds to raise long-term resources; while HFCs can increase long-term funds through issue of bonds and debentures.

HFCs do not require obtaining licenses for opening of new branches or office. They only have to inform the NHB of their intention to open a new branch or office.

In May 1999 ICICI Home Finance Company was included as a 100 % subsidiary of ICICI Personal Financial Services, the bank’s one-time consumer banking arm. Since May 2002, ICICI Home Finance has become a fully possessed subsidiary of ICICI Bank.

The bank is charging 12 % interest for home loans above Rs 20 lakh, which is 50 basis points higher than the interest on home loans up to Rs 20 lakh.