Government schemes add to the woes of private housing finance companies

Private companies in the housing finance industry are facing challenges from many fronts as government schemes and weakening demand in the real estate sector, during the pandemic, are eating away their business. 

Private lenders are losing business due to the government's fixed interest rate housing loan scheme for government employees. 

The scheme allows government employees to obtain housing loans at nine percent of which the government pays five percent as a subsidy. 

Earlier, in August 2018, the government introduced the scheme at a 10 percent interest rate; which was reduced to nine percent by the finance ministry in January this year. 

Private banks and housing institutions cannot match these rates as their cost of funds varies around the 10 percent level. 

A senior officer of Delta Brac Housing Finance Corporation Ltd, told The Business Standard, seeking anonymity, government banks and the Bangladesh House Building Finance Corporation Ltd (BHBFC) are financing these clients under this scheme. 

These loans are fixed rate loans without any refinancing facility for the lenders; that is, once disbursed, the rate of the loans cannot be changed, he added. 

He said: "Many government employees who used to apply at our company and other private banks for their housing loans are now applying to the government banks and BHBFC for housing loans to get the interest subsidy." 

The phenomenon has resulted in a more competitive environment for financial institutions. 

Private housing lenders would be in a steady position if the government made amendments to the scheme and made the rate of the clients variable, said the source.

Nasir A Chowdhury, chairman of Delta Brac Housing said, "As a specialist housing finance institution, we also feel the necessity of increased patronage from the government and regulators to optimise our competence."

He added: "Currently, under central bank regulations, non-banking financial institutions are not allowed to take term deposits shorter than three months; whereas scheduled banks have access to deposits without fixed terms, which results in relatively cheaper funds."

"In this circumstance, to enhance the competitiveness of the financial institutions sector, the regulators should rethink this policy and allow financial institutions with a superior credit rating to intake deposits with tenure of a minimum of one month."

He also said in order to ensure healthy growth of the housing sector and to encourage the growth of middle income clientele, the central bank should take the necessary steps to resume housing refinance schemes to support non-banking financial institutions to lend in the real estate industry.

According to the Delta Brac Housing annual report, the real estate sector continues to be one of the driving forces of the national economy. 

The existing price level of apartments is still unaffordable for middle-income clients. The tight liquidity situation and high interest rate during the year also made the loans costly for potential customers. 

There was a general expectation that the high registration cost would be reduced, but apart from small changes in stamp duty, the registration cost remained high. Moreover, the price of raw materials, particularly the price of rod and cement went up during the year. As a result, the price level of apartments increased further; having a negative impact on sales.

According to Bangladesh Bank, the real estate sector, and its related business, is projected to contribute 5.20 percent to national GDP this year; which clearly leaves scope to optimise the contribution of this sector. However, the sector has not achieved this and thus realtors' expectations about good sales growth in 2019 remained unfulfilled. 

There are two specialised housing finance private companies in the country - Delta Brac Housing and National Housing - that are listed on the stock markets. The public sector government also runs a specialised housing finance company named Bangladesh House Building Finance, which is the market leader in this sector.

Delta Brac Housing Finance's home loan portfolio was worth Tk4,344 crore until June 30 this year. National Housing's portfolio size was Tk1,381 crore.