Banks may not warm up to home loans

To go slow on sanctions for second homes.

Individuals seeking home loans for purchasing a house for investment purposes are no longer welcome at banks. Lenders have become cautious and do not want to be part of speculative interest in residential real estate.

Individuals wanting to take a second home loan should not be surprised if banks decline to oblige. A banking source said, "Banks have categorically asked branch officials to stop sanctioning repeat housing finance."

This measure is part of banks' efforts at tightening credit sanctions in the backdrop of persistent wide gap between resources and credit growth. Banks together disbursed a total of Rs 80,000 crore of home loans in 2005-06, as retail credit drove growth in banks' balance sheets for over two years now.

Bankers said tightening home loan measures have been put in place as the rise in interest rates to 9-10.25 per cent from a low of 7.5-8 per cent more than a year ago has failed to dampen the demand for credit.

The demand for home loans was driven by rising aspirations for owning homes and moving to bigger houses on the back of salary increases in top eight cities. There was also a large speculative interest from individuals willing to service home loans through cash flows from rent received.

Bankers fear that the increasing trend of buying homes for investment purposes could encourage speculative purchase of more than one homes by individuals and raise the prospect of a residential real estate price bubble. Real estate prices have almost doubled over the last one year in cities such as Mumbai and Delhi.

Bankers say the increase in prices of houses has thus far not impacted demand for homes. The prices are within reach because of a sharper rise in incomes of individuals and the moment the demand slows because of property rates, a price correction will happen, they added.