Leading Banks Selling Bad Home Loans

June 27, 2007: For the last two quarters, there has been a considerable rise in default cases from retail customers. The situation has forced the top loan providers in the country: ICICI, State Bank of India (SBI), and HDFC, to sell their bad home loans.

All three companies have recently approached the ASSET Reconstruction Company Ltd (Arcil) to sell bad home loans worth Rs 200 or 300 crore each. Indeed, almost all banks are facing the problem of bad credit. Arcil buys bad loans at a discount and sells the asset for profit.

Arcil takes these bad home loans on its own balance sheet; a subsidiary will be established to cater property evaluation, cheque collection, and other allied services.

The company is buying retail loans scattered across the country for Rs 100 crore to Rs 150 crore each. The transactions are likely to be over by the second quarter. As for now, the banks are in negotiations.

Interest rates on home loans have increased from 8 per cent to 10-12 per cent in 1 year. This observably increased the equated monthly installments (EMI) to an unaffordable limit for borrowers.

Customers failed to pay their EMIs as well as rent for their present accommodation. Retail customers came up as the worst sufferers, says sources Arcil.

As per the verification reports, there has been a 3.5 to 4 per cent default in home loan repayments whereas it was reported to be 2 per cent a year ago. Increasing interest rates on home loans has given a push to default cases for India’s largest commercial bank, says O P Bhatt, Chairman, State Bank of India.

ICICI, SBI, and HDFC are the major home loan providers in India and they are believed to add to their home loan portfolios at an average annual rate of 28 per cent in the past three years.

Source:Business Standard