BEFORE THE COMPETITION COMMISSION OF INDIA Case No. 5/2009 DATE OF DECISION: 2.12.2010 Informant: Sh. Neeraj Malhotra, Advocate Opposite parties: 1. Deustche Post Bank Home Finance Limited (Deustche Bank); 2. HDFC Limited (HDFC); 3. HDFC Bank Limited (HDFC Bank); 4. LIC Housing Finance Limited (LIC Housing); 5. Allahabad Bank; 6. Canara Bank; 7. Corporation Bank; 8. ICICI Bank Ltd. (ICICI); 9. Indian Bank; 10. Indian Overseas Bank (IOB); 11. Oriental Bank of Commerce (OBC); 12. Punjab & Sind Bank ( P&S Bank); 13.Punjab National Bank (PNB); 14. State Bank of Hyderabad (SBH); 15. State Bank of India (SBI); 16. Vijaya Bank Page 1 of 170 ORDER The present information has been filed under section 19(1) (a) of Competition Act, 2002(the Act) by informant Neeraj Malhotra, against banking and non banking financial companies for the levying of Prepayment Charges on the prepayment of amount of home loan taken. The opposite parties are private and public sector banking and non-banking financial institutions, engaged in the business of offering different types of loans including retail home loans, to the general public. Before examining the various elements of the alleged violation of the provisions of the Act , the findings of the Director General during investigation and the contentions of the Opposite Parties, it is necessary to look at the overall environment prevailing in the retail home loan market. BACKGROUND Retail home loan market in India 1.1 Housing market in India took off mainly since the year 2001, as evidenced by the growth in bank exposure to the sector. The rapid growth in housing loan market has been supported by the growth in the middle class population, favorable demographic structure, rising Page 2 of 170 job opportunities in the metropolitan centers, emergence of a number of second tier cities as upcoming business centers, IT and ITES related boom and rise in disposable incomes. Furthermore, attractive tax advantages for housing loans make them ideal vehicles for tax planning for salary earners. 1.2 The real estate market has also grown rapidly recording considerable annual price appreciation in recent past. The real estate market has also been boosted by the proposal to permit 100 per cent FDI in the sector. For banks and other housing finance institutions, the regulatory framework enabled expansion in house loan portfolios given the helpful prescriptions on risk weights for housing exposures and the benefits of compliance with the regulatory targets mandated for priority sector lending. Besides, housing loans growth by financial institutions has been assisted by the comfort of relative safety of such assets given the tangible nature of the primary security and the comfort obtained from The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002. Page 3 of 170 1.3 One of the most significant factors that drove the growth of housing market in India in the recent years was the easy availability of bank finance at affordable interest rates owing to surplus liquidity with the banking sector coupled with the softening of interest rate environment on the back of lower inflationary expectations. 1.4 With the increase in the consumer demand and to fill the demand supply gap, many financial institutions emerged providing lending services at attractive interest rates. There are two different types of lending institutions viz., Banks and Non Banking Financial Companies (NBFC). The banks apart from lending can accept deposits of current and savings accounts and fixed deposits, whereas an NBFC can only accept fixed deposits and also lend. 1.5 There is no interest paid to the balances of current accounts and for savings accounts the rate of interest paid is 3.5% p.a on a daily balance basis. When there are sufficient balances in these accounts the bank would not require to approach any other financial institution for relending purposes. In addition to these current and savings account (CASA) balances, if needed bank can source the funds through fixed deposits for a short term of 15 days to as long Page 4 of 170 as 10 years. The banks also raise funds from National Housing Banking Finance and other financial institutions for relending purposes. 1.6 NBFC source their funds primarily through other financial institutions and fixed deposits. Since they don’t undertake the business of CASA operations through which the cost of funds would have been cheaper, the NBFC generally offers higher rate of interest to the fixed deposit holders. Also the lending rates of the NBFC are generally higher. Home loan market composition: 1.7 The Indian home loan market is catered by many public sector and private sector banks along with the Housing Finance Companies (HFC). HFCs are the Non Banking Financial Companies. According to the report of ICRA in their report dated June 17,2010 “Performance Review of Housing Finance Companies and Indian Mortgage Finance Market for 2009-10 and Industry Outlook”, the major players in the home loan market are HDFC with 17% (along Page 5 of 170 with HDFC Bank), State Bank of India (SBI) 17%, ICICI Bank 13%(along with ICICI Home Finance), and LIC Housing Finance (LIC HFL) with 8%, account for 55% of the total housing credit in India (as of March 31, 2010). Apart from these big players, there are some HFCs with relatively smaller credit portfolios operating in their respective areas or serving niche customers. Small HFCs over the past few years are growing their portfolio considerably. 1.8 Credit portfolio of the HFCs as well as scheduled commercial banks year wise from 2004 is given below: Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 HFCs 3540 4680 5980 7340 9120 11050 13410 SCBs 8940 13470 18520 2310 25570 27240 29720 Total 12490 18150 24500 3044 34680 38290 43130 Rs. In crores 1.9 According to the ICRA report credit growth in the Indian mortgage finance market improved to 12.6% in 2009-10 from 10% in the previous fiscal drawing on several factors, including a healthier operating environment, expectations of appreciation in property Page 6 of 170 prices, and attractive interest rate schemes offered by banks and housing finance companies (HFCs). Although housing loans remain the main source of revenues for small HFCs, the proportion of other loans in their loan book increased to 8% as on March 31, 2010 from 7% the previous fiscal. Factors affecting non-price competition in retail home loan market: 1.10 In this decade business of home loan market has grown rapidly with many players forayed into this business. In this regulatory environment where the interest rates are almost similar across the banks adhering to the prudential norms of the central bank, increasing the customer base by improving the service standards became a practice. These can be said as non-price competitive factors which are as under: 1) Providing the loan to the customer depending on the need of the customer by providing an option for loan on either fixed or floating rate of interest rates. Page 7 of 170 2) The technical support provided to the borrower in choosing the home w.r.t choosing the property in the desired market, making the customer aware about the prevalent market prices and also assisting in getting documents from the builder by checking its authenticity. 3) Depending on the risk appetite of the banks about its customers, some of the guidelines are liberal to some credit worthy customers, without asking for the guarantor or reducing the margin money for availing the loan. This was help to many customers who are credit worthy buyers but without any guarantor. 4) Helping the customer with door step service without asking him to visit the branches for their procedural works. The busy customers would be interested in this type of services. Types of home loans: 1.11 There are two types of home loans. One is the fixed rate loan and the other is the floating rate loan. In the fixed rate loan, whatever interest is fixed on the start of loan is carried on for the complete period. However, for the other the interest rate is not fixed and is completely dependent upon the market forces. As the interest rate goes up or comes down the burden is transferred to the person and Page 8 of 170 the Equated Monthly Installment (EMI) fluctuate accordingly. Also there can be an increase or decrease in the tenor of the loan depending on the rise of the interest rates. In these fluctuating market conditions banks are more interested in offering floating rate than the fixed rate products. Factors influencing interest rates: 1.12 Home loan interest rates are dependent largely on the monetary policy of the RBI. The rate of interest would be influenced by the increase/decrease in the repo rate, reverse repo, statutory liquidity ratio (SLR) and cash reserve ratio (CRR). These terms are explained below: Cash Reserve Ratio(CRR): 1.13 Cash Reserve Ratio is the amount of mandatory funds that commercial banks have to keep with RBI. It is always fixed as a percentage of total deposits. These deposits are designed to satisfy cash withdrawal demands of customers. CRR is also called the Liquidity Ratio as it seeks to control money supply in the economy Page 9 of 170 1.14 The higher the cash reserve (CRR) required, the lower the money available for lending. The bank has to compulsorily keep a part of the deposits of the customers’ accounts with the RBI. Hence this reduces credit expansion by controlling the amount of money that goes out by way of loans. 1.15 CRR can be used as a tool to bring down inflation which happens due to excessive spending power. Spending power is augmented by loans and if money that goes out as loans is controlled, inflation can be tamed to some extent. Statutory Liquidity Ratio (SLR): 1.16 SLR is the portion that banks need to invest in the form of cash, gold or government approved securities (Bonds) before providing credit to its customers. The quantum is specified as some percentage of the total demand and time liabilities of the bank and is set by the Reserve Bank of India. 1.17 Time liabilities are the fixed deposits of the customers with a bank for a fixed tenor whereas demand liabilities are the fund balances available in the saving and current accounts of the customers. Page 10 of 170