Banks could face more home loan defaults

May 17, 2007: The National Housing Bank (NHB) is keeping a close watch on the possible defaults that could take place due to rise in equated monthly instalments (EMIs) on home loan borrowers. Though there is not much concern on housing finance companies, but in the case of housing loans provided by banks.

Industry estimates suggest that about 85-90% of home loan borrowers have taken loans on a floating-rate basis. Lenders like Housing Development Finance Corporation (HDFC), ICICI Bank and State Bank of India (SBI) also have about 90% of their existing home loan customers on the floating-rate basis. Last year, housing finance regulator NHB released a study projecting that 93.5% of the home loans borrowers had used the floating-rate mechanism.

“We are thinking that people who own single house for accommodation purpose should not feel the pinch of the rise in EMIs. Rather the burden should be borne by people who own two or more houses, most of the time, which is for speculation purpose of selling when property prices appreciate,” says RV Verma, executive director, National Housing Bank.

He said that the regulator is currently studying the data to assess the impact on the hike in EMIs on defaults. “We have not come up with any number yet, but we are studying,” said Mr Verma. Similarly, the government, on its part, has been keen that the impact of high interest rates should somehow be softened on small-and-medium borrowers. Union finance minister P Chidambaram had asked chief executives of public sector banks to protect the interests of borrowers in the Rs 8-10-lakh category to the extent possible.

The last fiscal witnessed a steep surge in interest rates. For example, in case of HDFC, floating rates for home loans had gone up to 11.25% from 8.5% in the beginning of FY07. Officials say that various housing finance companies say that in case a borrower is well below the retirement age, the loan period gets extended while the EMI remains constant. However, customers may well opt for a higher EMI without changing the loan tenure. A customer may also prepay part of the loan to keep the EMI and tenure unchanged.

However, there is an increasing fear of defaults in case the tenors are extended for customers. Some of the banks are reluctant to increase the repayment period beyond 20 years. Every 0.5 percentage point rise in home loan rates translates into a higher EMI of around Rs 32 per one lakh for a 20-year loan. Likewise, customers would need to pay an additional Rs 30 per one lakh for a 15-year loan, Rs 28 per lakh for a 10-year loan and Rs 26 per lakh for a 5-year loan.

Source: The Economic Times