Don’t count on bank for your second home loan

MUMBAI: People looking for a home loan to buy flats larger than their current homes as an investment option, or to secure the future of their children, may now find it difficult to obtain finance. Banks, which once zealously solicited loan takers, are now turning them away.

In line with the RBI’s ‘warning signal’ to banks issued earlier this week on credit policy, Finance Minister P Chidambaram has urged banks to curtail their lending to ‘overheated sectors’ like real estate.

“While it is a good sign that people are willing to leverage current earnings over a longer term to acquire assets of a much larger size, we must be on guard on this,” he said at a banking conference in Hyderabad.

What Chidambaram meant was that although investing with an eye on the future is sensible, care should be taken to discourage speculative buying.

Bankers agree. “We are seeing more and more people buying more than one flat or going for a bigger flat,” said KN Prithviraj, chairman and managing director, Oriental Bank of Commerce. “We have to be more careful in giving loans to such people and must apply prudence to determine whether the person can repay the loan.”

The RBI governor had also spoken of ‘overheating’ earlier this week while raising the repurchase rate (the rate at which the central bank lends to banks) by 25 basis points (100 basis points make 1 per cent). The move signalled that money is getting expensive and banks will have to lend cautiously in the future.

While bankers denied that home loan rates were on the way up after the RBI issued the caveat on Tuesday, the finance minister’s comments on Friday have clearly put the onus on banks to manage their deposits better.

Already, there are signs that bankers are taking the cue. IDBI Bank chairman VP Shetty has said that his bank will slow down loan disbursal to the real estate sector.

Bankers say the huge growth in realty value has lured both builders and buyers to purchase property that may not be within their financial reach. Yes Bank chairman and managing director Rana Kapoor conceded that borrowers are dealing in speculative realty.

“In the past four to six quarters, there has been a strong growth in the realty lending sector, which needs to be rationalised,” Kapoor said. “Banks have to reallocate resources to other growth sectors, which have an equally promising outlook, such as agribusiness, life sciences, textiles, manufacturing, infrastructure and retailing.”

OBC chairman Prithviraj said home loans are growing at an exuberant rate and some fraudulent practices have come to light, making caution essential.

Chidambaram’s comments in Hyderabad give banks two options: either to go slow on credit or to mobilise deposits faster to finance high credit growth of 30 per cent. Given the difficulty banks are facing in competing with other forms of investments, they may choose the first option.