At a time when sluggish credit growth is threatening to stunt the evident overall recovery, and corporate credit is also not yet taking off, banks are making a last ditch effort to expand their loan portfolio through home loans.

With an improvement in employment prospects and income turning steady after the lull in 2008 and early 2009, demand for houses is growing gradually.  Festive season home loan schemes just added the much-needed fuel to this recovery.

“There has been some pick-up in retail demand following the introduction of festival home and car loans at attractive interest rates which is improving the credit offtake scenario,” said Albert Tauro, chairman and managing director, Vijaya Bank.

Big lenders such as State Bank of India and ICICI Bank are betting on growth in retail loans, especially home loans, to prop up their overall credit expansion. For most players, home loans form at least 6-10% of their total credit portfolio.

Year-on-year growth in banks’ total loans has slowed to single digit and was just 9.5% as of October 30 compared with 28.4% a year ago, according to the latest RBI data.
As of August 28, outstanding housing loans of banks were Rs 2.85 lakh crore, or 10.8% of total loans, the RBI’s macroeconomic report showed.

In the first eight months of 2009-10, home loans had grown 4.5%. Most banks witnessed at least 20-25% growth in their home loan book in July-September, and expect to see a similar trend in the coming quarters too.

Last week, Bank of Baroda chairman M D Mallya had said the bank’s home loans have grown 25%. Union Bank of India’s home loan book has grown 24-25%, according to S L Bansal, general manager — retail banking.

Housing Development Finance Corporation, the country’s largest home loan lender, is already witnessing a rise in loan applications, according to joint managing director Renu Karnad.

“The segment where we are seeing good demand is in the price range of Rs 30-50 lakh in metros and bigger towns and around Rs 20-25 lakh in smaller towns,” Karnad said.

With loan applications rising, bankers expect to turn these into disbursements in the coming months, thereby giving a fillip to the overall disbursals of banks. Banks are also cashing in on the rising demand by extending their special home loan schemes that offer lower fixed rates.

State Bank of India recently extended its special 8% home loan scheme to up to March 31. Every month, SBI is witnessing disbursals of Rs 2,000 crore, chairman O P Bhatt had said on October 31.

Following SBI, Corporation Bank extended its scheme to March 31 while Axis Bank also announced a special scheme through which the bank will dole out loans at 8%. Union Bank of India has a scheme wherein borrowers will have to pay 8.5% fixed rate for the first three years.

However, a sharp rise in property prices could pose a risk to the rise in home loans.
HDFC’s managing director Keki Mistry feels property prices have to be reasonable for the pick-up to turn into a concrete boom. “People do not buy houses just based on interest rates,” Mistry said on Monday.

Property prices have already started inching up in major metropolitan cities, and the rise has been sharper in Mumbai and New Delhi. “We are seeing some pick-up in demand for home loans. But for this demand to sustain, builders will have to maintain prices at current levels, else demand will get diluted,” Punjab National Bank’s chairman and managing director K R Kamath said.

Nevertheless, some bankers said the rise in property prices in most areas is not sharp, and may not dampen demand.  Another risk is the expected turn in interest rate cycle as the Reserve Bank of India readies a strategy to withdraw the accommodative
policy. But some bankers noted that monetary policy withdrawal could have an impact on banks’ lending rates only by March-end.

“I don’t think it (rates) will go up much. If rates go up, it will be mostly in February or March. And I don’t think property prices will go up in a big way. The government is investing in affordable housing also,” said Bansal of Union Bank of India. Rising home prices may pinch buyers’ pockets but affordable home loans seem set for a long stay.

There are fears that a rapid home loan expansion, amid a potential rise in housing prices, may also push up banks’ non-performing assets (NPAs).  For instance, State Bank of India witnessed a sharp rise in its net NPAs in July-September, driven mainly by its retail portfolio. The bank’s net NPAs rose to 1.73% by September from 1.55% as of June 30.

Demand for home loans is expected to remain strong in coming quarters.  What bankers need to watch out for is maintaining asset quality as they give a home loan push to credit offtake.