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, favourable demographic structure, rising 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.

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 (NBFCs). 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 per cent per annum 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 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