Housing loans: no cause for alarm yet

The Reserve Bank of India has recently voiced concern over competition in home loan financing. It has suggested that the lenders should not lend below their cost of funds.

There are also reports that RBI is thinking of making it mandatory for all banks to insist on a security margin. In this context, it is useful to recall the experiences of Indonesia and Thailand just before the crisis of 1997.

In both the countries, it was the real estate bubble that led to the crisis. In east Asia during 1996, the share of real estate in bank loans ranged between 15 and 45 per cent.

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Table 1: Potential real estate exposure of east Asian countries (1996)
Country	Real estate as % of bank credit	Average exposure to real estate as % of GDP
Hong Kong	44-50	76
Taiwan	35-45	58
Malaysia	30-40	58
Thailand	30-40	44
Singapore	30-40	30
Korea	15-25	17
Philippines	15-25	17
China	35-40	9
Indonesia	25-30	7
Source: John M. Quigley, 2001, Real Estate and Asian Crisis, University of California Berkeley

There was also significant exposure to short term foreign loans in order to meet domestic demand of real estate investors.

In India too, the housing loan market has taken off. Since there are several benefits to the banks in providing home loans, there is fierce competition and interest rate cuts.

All possible means are being used to attract homebuyers. Alternative choices between floating and fixed rates are being offered.

Discounted rates have been offered as low as 8.25 per cent for home loans up to a tenor of 20 years. The loan amount being offered has gone up to 110 per cent of property value to take care of furnishing costs.

There are also schemes such as the "home saver scheme" on offer, where the customer is not charged any interest for the amount of deposit he maintains with the bank.

Some loan providers are becoming pro-active in tying up with developers to provide loans without processing charges or at lower rates.

The share of real estate loans in total non-food credit in June 2002 was 0.58 per cent as against 0.47 per cent in June 2001.

Housing loans, however, constituted 3.97 and 5.54 per cent, respectively. Thus, housing loans grew by 60.13 per cent as against 14.66 per cent growth in total non-food credit for the same period.

In volume terms, as on June 28, 2002, the credit to housing sector stood at Rs 26,983 crore (Rs 269.83 billion) as against total non-food credit of Rs 48,6847 crore (Rs 4868.47 billion).

Growth in housing loans during financial years ending March 2001 and 2002 were 14.49 per cent and 38.43 per cent, respectively, as against growth in gross non-food credit of 14.49 and 12.49 per cent, respectively.

Table 2

But the volume remains small in terms of the share of non-food credit. But the growth rates of both housing as well as real estate loans are significant.

Also, falling interest rates have reduced the monthly installments on home loans. With income tax sops, low interest rates and rising rentals, the chances of default are small.

This borne out by the fact that the lending institutions unofficially claim a default rate of no more than 3 per cent, most of which is technical, rather than real, default.

The share of non-priority sector in total non-performing assets is very high in case of some banks involved in housing finances (for example HDFC, ICICI and Global Trust in Table 3) as compared to the State Bank of India, while the share of NPA as percentage of total assets or total advances they are comparable or better than SBI.

Table 3

Considering SBI as the role model, other banks are not worse in maintaining prudential norms. The situation in India is also different from that east Asia because housing and real estate loans are treated differently by RBI.

Housing loans are mostly given to individuals while real estate loan are given to the developers and investors. RBI considers the latter to be sensitive as they are not as secure as home loans.

Thus, on an overall view, the volume and fundamentals are not alarming at present. The Indian housing boom does not replicate the problems associated with the east Asian crisis, particularly with the lower exposure of banks to foreign loans and the absence of crony capitalist in banking sector.

However, there might be some risk of collusion between private sector banks and property developers.

Therefore, some steps regarding prudential norms might be in the interest of the financial stability.

The new Basle norms on capital adequacy ratio, expected to come into effect from 2006 where risk weighting of assets is required, could be pre-poned.

(The writer is a senior economist at the National Council for Applied Economic Research)

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