How is LIC Housing Finance able to offer lowest interest rates ever on home loans?

KEY HIGHLIGHTS

• LIC recently raised over Rs 1,000 crore at a rate of 5.90 per cent, one of the best in the market
• The sovereign or the central government raises money at around this rate from banks and institutions.
• Interest rates are expected to reduce further, which offers opportunity to raise additional resources.
• Other stable source for LIC is the mobilisation of fixed deposits from the market, especially retail investors.

At a time when the non-banking finance companies are running  helter-skelter to raise resources and manage their loan portfolio, the housing finance arm of Life Insurance Corporation (LIC) has come out with an all-time low home loan interest rate of 6.9 per cent for loans up to Rs 60 lakhs. The country's largest bank, the State Bank of India (SBI) offers a rate of 6.95-7.0 per cent on home loans up to Rs 30 lakh.

Unlike banks, which have the advantage of low cost current and savings accounts or CASA, the NBFCs are in a disadvantageous position vis-a-vis banks in offering low interest rates.

How is LIC Housing Finance, a subsidiary of LIC, managing mouth-watering interest rates to new home loan borrowers?

Also read: LIC Housing Finance reduces interest rates to all-time low; all you need to know

This triple A rated NBFC has a good control over its cost of funds. LIC Housing Finance's cost of funds is around 5.5 per cent. The housing finance company is quite successful in raising resources at a low cost post-Covid since the banking system is flush with liquidity. The interest rates have also softened in the last one year.

The company recently raised over Rs 1,000 crore at a rate of 5.90 per cent, one of the best in the market. The sovereign or the central government raises money at around this rate from banks and institutions. Sources say the Reliance Industries Ltd ( RIL) has parked Rs 300 crore plus of its surplus funds via the non convertible debentures. Similarly, the HDFC Bank has invested substantial funds in its NCDs for safety, and returns, when there are not enough lending opportunities in the market. "There is also a risk in lending in these times. You are not sure how bad the situation will be in the next 6 to 12 months," says a debt market dealer.

Going forward, the interest rates are expected to reduce further, which offers opportunity to raise additional resources.

The other stable source for LIC is the mobilisation of fixed deposits from the market, especially retail investors. The company has been offering 6.0 per cent for one to two years and 6.10 per cent for three to five years.

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At the operational front, the low NPAs and a low moratorium book (below  25 per cent) is also giving confidence to the management to use the current opportunity to underwrite good home loan business. In fact, the CIBIL's credit score for fresh loan borrowers at 6.9 per cent is set at 700 plus. The credit score indicates the repaying capacity and the good credit behaviour of a borrower.