For most lenders (read banks), home loans are like the poster child, emblematic of their intent to contribute to the nation’s socio-economic well-being. And why not? Home loans are expected to touch Rs6.10 lakh crore by March-end 2012, up 15% from Rs5.29 lakh crore at March-end 2011 (`4.49 lakh crore at March-end 2010).
But, here comes a twist: the poster child has been showing signs of a slowdown in the last few months. Twist II: Not many in the industry are willing to acknowledge the current slowdown. And the final, improbable twist: Everyone is bullish that in spite of the slowdown - okay, there it is, the tacit acknowledgment - home loans will still notch up a healthy growth rate.
Gone are the heady annual growth rates like 45% (witnessed in 2005 when home loans totalled Rs2 lakh crore), to be sure. Why, even the 18% growth rate of last year certainly would not be possible this fiscal.
Sluggishness in home loans has been often attributed to high interest rates and overall slowdown in the economy. Rajiv Mehta, analyst withbrokerage India Infoline, says, “Since home loans are a long-term loan, with customers paying significant amount as equated monthly instalments (EMI), they become extremely rate-sensitive. Moreover, the moderation in real estate prices has not happened as expected either.”
This time, however, lack of affordable housing and phenomenally high property rates are important concerns. According to the RBI monthly data on sector-wise loan growth, the housing loan sector grew only by 12% in December 2011, lower than almost 14% in November.
Yet, experts hope that somehow the annual growth rate of home loans will be broadly in line with the 17-18% overall credit growth in the banking system. The expected pick-up in growth, they say, will come in only after the RBI cuts lending rates over the course of the next six months.
“For the banking industry, mortgages make up the bulk of retail advances (51%), followed by commercial vehicle loans (12%). We expect a stable demand for housing loans to drive retail credit,” say R Sreesankar, Priyanka Damle and Prerna Tiwari of Tata Securities in a report released last month.
Floating interest rate has increased by around 250 basis points (bps) since April 2010 due to a continuous increase in key policy rates. This would correspond to an average increase of 15% in EMIs, according to a Crisil Research report in October 2011. EMIs have increased for 40% of existing floating rate customers, while the remaining customers have chosen to increase their loan tenures or do a part payment. Customers paying higher EMIs face an estimated additional annual burden of around Rs3,500 crore.
So, to keep wary customers from fleeing the home loan market, lenders had kept various ‘festival’ offers open till late last month, much beyond their earlier deadlines. Housing and Development Finance Corporation, which had introduced a fixed-cum-floating product in October last year, extended its deadline each subsequent month up to January 31. The housing finance giant claimed it had no reason to let go of the product and pinned further moves on the RBI monetary policy.
State Bank of India, the largest bank, had also extended the 25 bps discount on home loans beyond December 31, following a Rs1,000 crore shortfall in its home loan portfolio in the first half of the fiscal.
But any potential gains from such sales pushes could be undone by new rules. Housing finance regulator National Housing Bank issued circular in October 2011 asking housing finance companies (HFCs) to remove prepayment penalty on housing loans. For its part, the RBI appointed an ombudsman for banks in September 2011, who asked banks not to levy prepayment charges on floating rate customers.
Most banks complied with this directive as they were not affected much by the move. HFCs, however, were said to be unhappy. “Most housing finance companies have a portion of the balance sheet allocated to the prepayment penalty. Now, with this move, companies will have to raise some other convenience charges to recoup the shortfall,” says a housing company official.
Despite the going getting increasingly tough, HDFC hopes to get going. It expects to grow its home loans by 18-20% over the next fiscal. “This has been our guidance for the last five years, but in practice, it turns out to be much higher,” says Keki Mistry, vice chairman and chief executive officer, HDFC.
Banks too sound bullish on growth of retail loans, especially home loans. “The home loan portfolio is expected to grow by 10-15% in the next one or two quarters. There is a likelihood of this portfolio picking up as the property rates have shown some correction across the country. If you are talking about high interest rates, it’s only a matter of time before they come down,” says MS Raghavan, executive director, Bank of India.
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