Home loan party over

Bankers expect growth rate to halve to 15% in '08.

The era of easy access to home loans appears over following the 300-basis-point increase in home loan rates and a near-doubling of property prices in 2006-07. As a result, bankers expect home loan growth rates to halve this financial year.

Home loan growth rates are expected to fall to 15 per cent after two years of robust 33-35 per cent growth and sharply below the expected overall credit growth of 22-24 per cent.

"The RBI's policy measures can be taken as a signal to bankers to exercise caution on the real estate sector, including home loans," said a senior official of a large public sector bank.

Almost 18 per cent of the increase in banks' non-food credit in 2006-07 was on account of home loans and another 5 per cent on account of loans to the commercial real estate sector. In 2005-06, home loans accounted for 12 per cent of the total loans.

Banks have already started becoming more selective in providing home loans. For one, they have altered the loan-to-value (LTV) ratio. Till recently, borrowers could avail of loans up to 90-95 per cent of the purchase cost of a residential property. Now banks are selectively moving to an 80 per cent LTV, the norm prevalent over three years ago.

Besides, the rise in interest rates is also making it more expensive for consumers. Every 100-basis-point increase in the interest rate on home loans knocks off nearly Rs 1 lakh from the amount an individual is eligible to borrow. Thus, borrowers who were earlier eligible for, say, a Rs 20 lakh loan, will now be able to borrow Rs 17 lakh. Many banks have held rates for existing borrowers but raised the rate for new ones.

In 2006-07, many banks also introduced prudential ceilings on exposure to the overheating real estate sector, including home loans. Each bank has set the exposure ceiling on the basis of its risk profile and asset mix. Home loans form 12-35 per cent of the loan portfolios of banks.

One large public sector bank has already hit the ceiling its board had set for home loans and commercial real estate exposure for the current financial year.

For ICICI Bank, which accounts for over 25 per cent of the mortgage market, exposure to home loans at the end of December 2006 was Rs 59,700 crore, over 34 per cent of the bank's total advances portfolio of about Rs 1,72,000 crore. With demand slowing, the share of home loans is expected to fall substantially.