Double-digit home loan rates are back

The year 2006 pulled interest rates on housing loans back to double digits, after low single digit rates for since 2003.

The banking sector's weighted average lending rate on home loans is set to touch 11 per cent in early 2007, a level last seen four years ago.

Banks raised their benchmark prime lending rates (BPLRs) by 150-200 basis points in three-four rounds in 2006, that's expected to take the weighted average lending rate of banks on home loans past March 2004 level of 10.66 per cent.

Interest rates on home loans have shot up to double digits from as low as 7 per cent in 2003 and 2004. The low interest rates, "easy" availability of home loans as banks, particularly private sector banks led by ICICI Bank and growing aspirations with rising incomes in an expanding economy all led to increase in home loan disbursements at a scorching pace.

Home loans portfolios of swelled over the past couple of years as banks used the opportunity to expand their size, but in the process the Reserve Bank of India (RBI) was left worried.

The central bank's concerns stemmed from the unbridled rise in property prices in the top 7-8 cities, helped by easy availability of credit for purchase of home loans.

Getting home loans became so easy that higher property prices did not dither individuals from going in for bigger homes, with lenders willing to lend even 100 per cent of the purchase cost.

Bankers did not see loan to value ratio of 90-100 per cent a bad credit assessment, as the amount of loan disbursed, they contend, was decided based on the repayment capabilities.

Banks home loan disbursement spree saw their outstanding portfolio as the end of March 2005 double to Rs 1,34,276 crore from a year earlier. The outstanding home loans further expanded to Rs 1,79,116 crore, up 34 per cent from a year earlier.

In 2005-06, banks disbursed over Rs 57,000 crore of home loans. ICICI Bank, the second largest bank, which drove the retail credit market account for Rs 25,740 crore of the disbursements during the year.

The RBI raised the risk weights and standard provisionings on housing loans, to make the mortgage lending business expensive for banks, apart from signalling increase in interest rates.

All this didn't appear to be working, when it resorted to further monetary tightening through squeezing of liquidity in the banking system. It first made liquidity availability expensive for banks by raising the repo rate by 25 basis points to 7.25 per cent in October.

Repo rate is the rate at which RBI makes short-term funds available to banks against deposit of government securities.

The central bank's second liquidity squeezing step "� increase in cash reserve ratio (CRR) by 50 basis points to 5.5 per cent from January 6 "� appears to have stirred up the banks to a possible reality of defaults in home loans rising substantially.

That's making them think about rebalancing their portfolios by going slow on disbursements, to ensure any adverse impact of home loans does not have a cascading effect.