Home loan interest rates likely to go up
In a bid to prevent deterioration of bank asset portfolios, the Reserve Bank of India (RBI) is expected to further tighten up on real estate lending norms, both for retail customers and developers.
Since the second quarter of this financial year, banks have faced asset deterioration with unbridled lending to the real estate sector. This category of asset portfolios has been faced with increased risk.
Anticipating this situation, the RBI had in the second quarter carried out some damage control measures, through increase in the risk weight ages for housing assets of over Rs 75 lac to 125 %. This meant that banks would have set a capital charge of Rs 15 for every Rs 100 lent to this category) and rising the provisioning on standard assets in realty to 2 %. This was in addition to prescribing a loan to value (LTV) ratio of 80 %.
But most banks had applied these steps only for their incremental loans — assets in the sector built up after the announcement of the policy. But sources said that RBI wanted these steps to be applied across the entire category of the loan assets in the sector.
This was in view of the mounting operational risks in lending to the realty sector. One instance of the operational risk that impacted the banking sector this year was the bribe-for-loan” scandal that claimed the chief executive of LIC Housing Finance Ltd.
Bankers said that the RBI had indicated that the LTV ratio be brought down to an average of 75 % across the entire category of real estate assets instead of only incremental assets. This meant that if the asset value was Rs 100, bank funding would be only Rs 75. This also means that new borrowers will have to bring in more equity, which could be as high as 40 to 45 %. Financial Planning
Currently, the average for some of the public sector banks was closer to about 85 %. Only some private sector banks like ICICI Bank Ltd had brought down the average ratios, though this was partly achieved by securitisation methods (bundling assets into pass-through vehicles and sale of the same). As a result, ICICI Bank’s realty sector LTV ratio is only 55 %.
The banker said that tightening of the entire portfolio would mean that banks would end up creating additional charges from their own respective balance sheets. This, in turn, would translate into lower net profits or red-lined balance sheets for some of the public sector banks. In addition, higher risk weights were also expected to be reduced to cover assets valued at Rs 50 lac, as against Rs 75 lac prescribed in second quarter monetary policy review. “There is no other option before the RBI but to further tighten the measures. Inflation is galloping and rising property prices are indicating the making of a bubble. If the RBI does not intervene today, the banking sector would be exposed to more risk. This is a good move and now developers will be forced to lower prices to generate funds,” said Pankaj Kapur, chief executive officer, Liases Foras, a property research firm.
Not surprisingly, developers are an unhappy lot, saying that the proposed RBI move would cause further shortages of houses and was against the interest of house buyers. “For the last three months, banks have stopped lending to us. Now, we have to look for an alternate mode of funding. The proposed drastic measure by RBI would cause shortage of funds and 50 % of the supplies in the pipeline will be affected. This would further push up property prices,” said Sunil Mantri, president, Maharashtra Chamber of Housing Industry, one of India’s most powerful builders’ lobby.
He added that the RBI, rather than blaming the developers for the rise in real estate prices, should stop land auctions by government agencies like NTC Ltd that could tame the price rise. “The home loan rates must also come down to enable buyers to afford a home. The current trend is anti-people,” Mantri said.
Meanwhile, sources in the banking sector said that the RBI’s stringent norms would translate into higher lending rates for home loans. This step comes even as the government was mulling discontinuing tax sops for home loans. In addition, there was also a distinct possibility that borrowers would now have to provide for additional margins for home loans. This was because the steps were now likely to translate into deflating the real estate bubble.
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