Banks to focus on home loans between Rs 10 lakh and 15 lakh

Since the reduction in interest rates of home loans people have started planning for buying their dream house. Banks have also started giving loans for buying house however the banks are now planning to emphasize on home loans which are below Rs 25 lakh.

The bankers are expecting an increase in the demand for small ticket home loans; therefore they are taking steps to persuade the customers with speedy procedures and attractive offers.

“There is a 75 basis point reduction in the interest rates on home loans. This will drive demand,” Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, told Business Line.

He informed that the bank main focus will be on home loans between Rs 10 lakh and 15 lakh as it would “definitely help profitability”.

Ms Renu Challu, Managing Director, State Bank of Hyderabad, pointed out that the recent reduction of capital requirement for home loans by the RBI will also help in aggressive lending by banks.

“Definitely, there will be a big push. SBH will also push home loans below Rs 20 lakh and 25 lakh aggressively. It is a priority sector for us,” she said.

Many other banks are also making housing loans as a priority.

“To regain the momentum, there should be a little effort from the builders’ lobby as well. They had taken the prices to unaffordable levels which should be brought down,” Mr Reddy said.

He added there is news that some builders are offering special discounts and bringing down the prices in order to push up the demand.

On the other hand the builders are happy with renewed home loan rates of banks. “The coming down of home loan rates will be beneficial for the end-users in buying properties at a better price. The developers will also be benefited as it will reduce lending cost,” said a spokesperson of real estate major DLF.

“DLF has increased its focus on mid-income housing and is already working on thin margins of 35 per cent which rules out price reductions. However, our offerings targeting mid-income groups are going to be well within the reach of consumers,” he added.

As per RBI data, the loan growth in the housing sector had slowed down slightly in the second quarter of the current fiscal year. But grew at about 14 per cent (Rs 32,792 crore) up to August 31, 2008 compared with Rs 34,333 crore in the year-ago period.

Arcil records show increase in home loan defaulters

There has been an increase in the number of defaulters on housing loans as individuals are facing the brunt of the high interest rate regime. The indication about this is the fact that the total security receipts (SRs) of Rs 1,100 crore issued by Asset Reconstruction Company (India) Ltd (Arcil) to banks between April-September 2008 for acquiring bad loans 20% were from home loan defaults.

Asset Reconstruction Companies (ARCs) is expecting further rise in housing loan defaults in the coming quarters in case the interest rates do not climb down. Said Arcil, managing director & CEO, S Khasnobis: ‘‘the retail loans, mainly housing loan default, form about 20% of the total SRs of Rs 1,100 crore issued by Arcil between April-September 08. The portion of Arcil's acquisition comprising retail loans is likely to rise given the current environment.'' When an ARC attain bad debts from a bank, based on a valuation they either pay cash or issue SRs which are under the hold of a trust and are redeemed after realization of assets.

Arcil, is the leader in attaining distressed assets, have acquired these bad loans in question from around 20 banks. However details of individual banks is not available, it appears that ICICI Bank's portion of the total SRs issued by Arcil stood around 30%. As per ICICI Bank report, the total value of bad loans sold by the bank to Arcil April 2008 onwards stands at Rs 608 crore for a sale consideration in excess of 62% of the gross loan book. Though it is not clear whether portion of this comprises retail loan defaults.

According to an ICICI Bank spokesman ‘‘Sale of retail NPAs has been one of the many tools adopted by the bank to proactively manage delinquencies in the portfolio. It is a standard activity undertaken in the normal course of business by all international banks. Sometimes the sale is conducted every quarter. Also, this is only a very small portion in the overall delinquency management strategy of the bank.''

Moreover NPAs have an adverse impact on shareholders' value of banks and financial institutions by bringing down margins. ARCs attain bad assets at a discount depending on the credit realization potential of the asset.

An industry expert said that banks in the further will be increasingly using ARCs to skim off their distressed retail assets so that they are not required to smear their hands in dealing with bad retail loans.

An official from ARC said although bad retail assets offer a huge opportunity, but it requires the right machinery (read, people) to gain monetary realization from such assets. Since beginning (August 2003), Arcil has been able to acquire total distress debt including overdue interest of over Rs 40,000 crore at an average valuation of 25%. Since setup SRs issued amount to approximately Rs 10,000 crore. So far, Arcil has already been able to resolve 65% of the non performing loans acquired till now and have recovered and distributed about Rs 2,800 crore to all the SR investors.