Slowdown in home loans to continue in 2008

The slowdown in home loan growth would continue in 2007-08, with disbursements expected to grow at only 10 per cent, on the back of a subdued 18 per cent growth in 2006-07.

Besides, the present home loan non-performing asset (NPA) figures of banks understate the extent of delinquency in the sector as loans given in the last three years, which form 71 per cent of the total outstanding home loans, are yet to season, according to a Crisil Research report on mortgage finance.

Mortgage finance by banks and housing finance companies grew 35 per cent on a compounded basis during 2000-01 to 2005-06 to Rs 86,500 crore, boosted by low interest rates and a booming economy.

However, a sustained rise in property prices during 2004-06 along with rising interest rates resulted in a significant slowdown in disbursements in 2006-07, which grew by only 18 per cent year-on-year. 
 

THE BIG PICTURE Movements in provisions for non-performing assets (Rs crore)
	Scheduled commercial banks	Public sector banks	Nationalised banks	State Bank group	Old Pvt sector banks	New Pvt sector banks	Foreign banks
Provision for NPAs
As at end-March 2006	30,226	25,024	18,078	6,393	1,992	2,214	994
Add : Provision made during the year	10,401	7,289	4,956	1,804	520	2,110	481
Less : Write-off, write back of  excess during the year	12,284	10,174	7,693	1,909	553	1,236	320
As at end-March 2007	28,343	22,139	15,341	6,288	1,959	3,087	1,156
Gross NPAs	50,486	38,968	26,291	12,677	2,968	6,286	2,262
Cumulative Provision to Gross NPAs (%)	56.1	56.8	58.4	49.6	66.0	49.1	51.1
Note : Figures in brackets indicates the number of banks in that group for 2005-06.

"Considering the current interest rate environment and factoring in possible salary increments for a borrower, we expect disbursements to slow down further to around 10 per cent in 2007-08," said the report.

In 2006-07, the proportion of monthly income being paid out as home loan instalments grew to more than 50 per cent for an average home buyer from around 32 per cent in 2003-04. Property prices needed to decline by at least 15-20 per cent for the affordability of a home loan borrower to improve, said Crisil.

The asset quality of the housing finance portfolio is likely to slide somewhat from the present levels. The number of borrowers considered "riskiest" by the lender, having loans with a maturity of more than 15 years and paying more than 50 per cent of their monthly income as EMIs had increased to 7-8 per cent at the end of March 2006, from 4-5 per cent two years earlier.

The average loan-to-value (LTV) ratio on the total outstanding loans has also gone up to 75 per cent at the end of March 2007 from around 70 per cent as on March 31, 2004.

"This is expected to increase further as the portfolio grows and older loans, contracted at lower LTV, mature. However, loans financed prior to 2006-07 have seen a drop in effective LTV due to rise in property prices. Crisil sees adequate cushion built into the housing portfolios in terms of effective LTVs being higher than documented LTVs," said the report.

The total home loan portfolio at the end of 2006-07 mainly comprised the last three years' disbursements as a majority of the loans taken prior to these periods have been paid off.

"This means we are yet to see the seasoning impact on the portfolio; therefore, we believe that the current figures understate the extent of delinquency in the sector," said the report.

Loans disbursed in the last one year at higher property prices and higher LTVs could see defaults with a substantial fall in the market value of such property. The borrower may have no incentive to repay the loan with the loan principal outstanding surpassing the new property value.

There could also be a risk of default if the rise in EMIs outstrips the growth in salaries. For a 400 basis point increase in interest rates, EMIs on 15-20 year loans taken in 2003-04 would have to go up by 10-26 per cent to fully absorb the impact of hike in interest rates.

"Salaries have risen by 13-14 per cent per annum over the last couple of years due to strong economic conditions. This pace of growth suggests that the temporary mismatch between increase in EMIs and salary increments might get corrected if the interest rate regime stays benign," said the report.

Lenders would have to place greater emphasis on appraisal standards, monitoring and collection systems to check any incipient deterioration in the credit quality of their home loan portfolios.