Default risks leading to Banks keep
away from Home Loans
MARCH 14, 2007: RISING INTEREST rates apart,
fear of falling real estate prices leading
to default risks is leading to banks keep
away from fresh sanctions of home loans. Even
as banks are "cautious" in lending for the
first house, lending for a second house is
almost ruled out, say bankers. The risk associated
with home loans has gone up substantially
in the recent past. The worry is, what if
real estate prices fall by over 15 per cent
- the margin banks keep on property prices
while sanctioning loans.
Typically, banks lend up to 85 per cent of
the price of the house/flat, leaving a 15
per cent buffer for a fall in property prices.
If the price of the property falls below the
85 per cent level, the borrower might have
a tendency to give up the asset against the
loan as he could own a new house for less.
Such a prospect increases banks' credit risk.
However, Indian banks do not subscribe much
to the loan-to-asset ratio.
The buyer seems to be watching the anticipated
fall in real estate prices more than the rise
in interest rates,The ceiling on total equated
monthly installments (EMIs) at 50 per cent
of the salary en- sures serviceability Lending
rates have gone up by 1.5-2 per cent over
the last 12 months across all personal loans.
Banks shy away from lending against a second
house because of the changed scenario. The
second house is bought mostly for letting
it out. "We want the transaction to be revenue
neutral. But though rentals have gone up,
they are nowhere near covering the costs in
the wake of the spike in real estate prices
and higher interest rates.Banks are expecting
home loan growth to slow down in the next
12 months. But housing finance companies,
for whom these are bread and butter loans,
expect to maintain their current growth rate.
Source:Hindustan Times
