Sunitha Natti - Express News Service - Last Updated : 03 Jul 2011 01:25:02 PM IST
On June 16, the Reserve Bank of India increased key rates for the tenth time in 16 months, and mortgaged India let out a collective curse. Bangalore-based software professional Mahesh Kumar, who had taken a housing loan of Rs 29 lakh at a floating interest of 9.25 per cent in May 2010, was one of those who cursed. He was slated to pay Rs 26,850 as EMI when he started; he’ll now be forking out Rs 31,900. With the cumulative increase of prime lending rates by 275 basis points since March 2010 (where 100 basis points equal 1 per cent), borrowers like Kumar are being forced to pay much more than anticipated while prospective buyers prepare to postpone their dreams.
Though the annual growth seems healthy enough, the rate hikes have led to a slowdown in the home loan market in recent months. The market grew by 14.3 per cent in May 2011 over April 2011. Compare this with the 44.74 per cent growth in January 2011 over December 2010. “Interest rate hikes will have a cascading effect on home loans and stifle growth since they scare away home buyers. Even the cost of funding from the developers’ point of view will shoot up,” says Lalit Kumar Jain, president of CREDAI and CMD of Kumar Urban Development Ltd. According to credit rating agency Crisil Ltd, the home loan market’s CAGR is 30 per cent and the total outstanding home loan portfolio is Rs 3.4 trillion. The growth is primarily due to falling property prices in non-metro regions. According to Residex, the residential housing price index of the National Housing Bank, property rates dropped in the quarter ending March 2011 over the previous quarter, across eight major cities. While cities like Hyderabad, Kolkata, Kochi, Jaipur and Surat witnessed a decline of 2-14 per cent, prices in Delhi rose by 2.4 per cent. Mumbai, Pune, Lucknow, Ahmedabad, Patna and Chennai too registered a marginal increase in prices.
The bankers don’t see the hike in interest rates stopping real buyers. “Customers need to consider property prices rather than interest rates because once the property is purchased, the price change does not impact. And considering that most housing loans are for 15 years or so, there will always be interest rate cycles that a borrower will have to live through. With most customers taking floating rate loans, they will be at an advantage when interest rates go down,” says Renu Sud Karnad, managing director, HDFC Ltd. Typically, two sets of borrowers exist: the genuine buyer purchasing out of necessity, and investors buying to cash in at a later date. Bankers believe that investors are currently out of the property-purchase scene, considering the high cost of funds. “Genuine buyers are going ahead with their purchase despite an increase in rates, which limits their borrowing limit to some extent,” explains Abhijit Bose, head, Retail Assets, Development Credit Bank, which offers housing loans at over 11 per cent.
The cost of a house as a multiple of the annual income of a borrower is currently estimated at 4.8-fold. In other words, it takes about 4.8 years’ income to buy a house. “As long as the ratio stays in the range of 4.2 to 5.5, housing loan demand will exist,” says Karnad of HDFC, whose average loan size in 2010 was Rs 18.6 lakh and loan to value ration just under 68 per cent. While some banks do offer fixed interest rates, a majority are opting for floaters as the differential between both is about 200 bps or 2 percentage points. To encourage customers, the State Bank of India had introduced teaser home loans in 2009 with a fixed rate of interest for the first three years followed by the bank’s base rate from fourth year. Following the teaser loan campaign, SBI became the largest home loans provider, pipping private-run HDFC Bank. As of December 2010, SBI’s outstanding loans stood at Rs 82,376 crore (that is 11 per cent higher than HDFC’s Rs 74,155 crore).
SBI’s retail home loan portfolio as of March 2011 was Rs 86,769 crore, up 22 per cent from fiscal 2010. “Right now, we don’t have fixed rates or teaser loans. We only offer floating interest and the year-on-year growth is over 22 per cent,” says Ajith Kumar, deputy general manager, Personal Banking Unit. But other forms of wooing continue. Some banks are waiving pre-payment and foreclosure penalties while others are clubbing products such as term insurance and accidental cover with the loan. SBI, for one, does not charge any penalty if a customer wants to pre-pay a part of the loan or foreclose an outstanding one. Nor are there any penalties levied if a customer wants to transfer his SBI loan to another bank or vice versa due to attractive interest rates. “Also, processing fee is taken only for applications that have been sanctioned a loan. This is a flat rate of Rs 10,000 for loans of up to Rs 75 lakh. For higher loans, we charge 0.50 per cent of the total loan with a cap of Rs 10,000,” says Kumar. Banks such as DCB and HDFC even encourage savings by allowing customers to park excess funds in the loan account. This surplus can be withdrawn when required. “This facility helps customers in reducing their interest cost, at the same time staying liquid,” says DCB’s Bose.
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