Borrowers said when they approached HDFC staff to inquire as to whether interest rates would be reduced in line with government directives they were told interest rates would not reduce by much, maybe by one percent. Some customers were also asked by bank staff to continue to pay in their instalments at existing rates for the time being until a downward revision is made.

HDFC borrowers complained that the bank was quick to increase interest rates on their home loans in 2008 when market interest rates moved upwards in response to the Central Bank’s tight monetary policy aimed at curtailing inflation.

Inflation peaked at 28.2 percent in June 2008.

But throughout 2009 the Central Bank gradually loosened its tight monetary policy stance as inflation declined reaching a low 0.7 percent in September.

In March 2008, the average prime lending rate of commercial banks was 18.61 percent. In January 2009, the average prime lending rates of commercial banks was around 18.60 percent. Today, it is 11.03 percent. Although HDFC is not a licensed commercial bank but a licensed specialised bank, these rates would indicate the level of interest rates in the market and their general movement.

"I obtained a housing loan for 195,000 against my balance in the Employees’ Provident Fund in 2008 and the interest rate was 12.5 percent. In March they increased the interest rate to 17.5 percent and notified me that this was done before market interest rates had gone up," an HDFC borrower told the Island Financial Review.

This customer called the bank in our presence. He was told the interest rate on his loan would soon be revised downwards by about one percent or so. "Until then they asked me to pay at 17.5 percent," the customer told us.

Making big margins a necessity...

The Island Financial Review checked HDFC’s website yesterday and found the bank was making healthy margins on their lending and deposits.

The website advertises various loan schemes with interest rates ranging from 19 percent and 24 percent. Its fixed deposit rates range from 7 percent to 15.25 percent.

When the government last year ordered state-owned banks to reduce lending rates to specific sectors the intention was to compel private commercial banks to do the same. Although overall market rates have fallen, banks have not fully fallen in line, because cost of funds were still too high with long term fixed deposits being contracted at higher rates.

In HDFC’s case however, reducing deposit rates and keeping lending rates at high levels was important in order to mitigate risks and improve profitability.

Fitch ratings improve...

The bank’s rating was improved last December by Fitch Ratings and it explain the difficulties the bank has to face and why interest rates on loans remain at high level, despite low market rates. Fitch gave the bank a ‘Stable’ outlook, an upward revision from a ‘Negative’ outlook.

"The revision of the Outlook reflects HDFC’s efforts at increasing interest rates on its existing loan book in order to mitigate its inherent interest rate risk; this helped improve group profits to date in 2009," Fitch said in a statement issued last December.

"HDFC’s rating also factors in its 51 percent state ownership, its perceived importance to the country’s low-and-middle- income housing, its considerable borrowings from state-related entities, low ultimate credit risk of its housing loan portfolio, and its relatively lower systemic importance compared to larger commercial banks," it said.

The rating agency noted that the rating could come under negative pressure if the bank fails to make timely adjustments to its lending rates to any increases that may occur in deposit rates.

HDFC’s return on assets recorded a positive growth of 0.79 by the September quarter of 2009 after recording a negative growth rate of 1.68 percent by the end of 2008 financial year.

"This was partly due to the re-pricing of almost 50 percent of the bank’s existing loans in October 2008, together with improvements in the average funding costs in 2009; improvements to funding costs were in turn driven by the sharp reduction in market interest rates during the same period.