Loans

"We have the product but we are waiting for certain clarifications on tax issues and the insurance tie-up. The taxation issue has been cleared and once the insurance tie-up is done, we will launch the product," LIC Housing Finance Director and Chief Executive R R Nair told PTI here.

The National Housing Bank (NHB) is tying-up with insurance companies, including LIC, for restructuring of reverse mortgage.

Reverse mortgage is a financial product that enables senior citizens (60-plus) who own a house to mortgage their property with a lender and convert a part of the home equity into tax-free income without having to sell the house.

"We do not have any date fixed for launching as we do not know how much time this (insurance) tie-up will take," Nair said, adding there was no upper limit in reverse mortgage as it was the percentage of property prices.

The percentage depends on discounting and age of the owner (life-expectancy), amongst others, he said.

Reverse mortgage would prove very beneficial for those senior citizens residing in India but whose children were settled abroad, he said. "For an NRI, spending a few lakhs on a property which can help his parents live in comfort and with which they could also generate income was not a big thing."

HFCs are complaining that the cost of funds is showing no signs of easing as banks are still charging around 12-13 per cent, which is higher than the average lending rate of HFCs.

For instance, HDFC and LIC Housing Finance Company, which together account for over 70 per cent share of the HFC market, charge around 11.5 per cent, while home loans from Dewan Housing Finance Company costs between 12 and 14 per cent.

"Our interest rates are a function of our cost of funds. We have always passed on the benefit of lower cost of funds to our customers and we will continue to do the same. As of now, we have not seen interest rates coming down even though RBI has taken steps to provide liquidity. The issue today is not of liquidity, but of credit and until it is made available, it would be difficult for anyone to bring down interest rates," said HDFC Joint Managing Director Renu Sud Karnad.

"With banks cutting home loan rates, there is an expectation of rate cut in the housing sector, but our cost of funds still remains high. In the foreseeable future, there is no scope for reduction in lending rates," added LIC Housing Finance Chief Executive Officer R R Nair.

Bankers said that in at least 10 per cent of the home loan accounts, there had experienced such slippages. Two years ago, when rates were low, the slippage was minimal. Only about 2 per cent of the home loan accounts experienced such slippages, the bankers said. Such slips in debt service payments notwithstanding, banks see little need to classify the accounts as sub-standard assets.

Albert Tauro, CMD, Vijaya Bank admitted, "There is an increase in debt service payment slippages. But this is not an immediate cause of worry. This was because despite the overdue payments, they were yet to reach the threshold level of 90 days. Assets are classified as non-performing only if the debt service payments were overdue for more than 90 days." Besides, for most banks, realty and home loans comprised less than five per cent of their gross assets.

Bankers said some realty projects had been left unfinished for want of buyers, increasing the risk of loan delinquencies. As a result, most of them were limiting loans to the realty sector to contain risks and assessing potential risks through stress testing of the assets. Stress testing implied assessing the potential for asset delinquency. Asset delinquencies were on the rise in several public sector banks.

On a review, it had now been decided, as a counter-cyclical measure, to effect changes in these norms, with immediate effect, RBI said in a circular to UCBs.

The central banks has brought down the provisioning requirement for advances from existing one per cent to 0.40 per cent of the loan amount.

The move taken would free capital to the extent of reduction in provisioning requirement that could be, in turn, used for increasing lending to targeted specific sectors, "except in the case of direct advances to agricultural and SME sectors, which shall continue to attract a provisioning of 0.25 per cent", it said.

The provisioning requirement was increased in February 2007 with a view to maintain asset quality in the light of high credit growth in the real estate sector.

He is likely to travel to all zonal headquarters in cities including Mumbai, Kolkata and Chennai between December 5-8. The move comes in the backdrop of industry complaining of unavailability of credit despite RBI's measures to ease liquidity.

FM Band

• Finance minister will go to all zonal headquarters between December 5-8
  
• The minister is likely to discuss measures to spruce up funding for infrastructure
  
• The ministry is collating data on sectoral credit flow to find out the areas of concern
  
• The industry is complaining of unavailability of credit despite RBI's measures

Another finance ministry official said while banks would be asked to ensure credit to their existing customers and honour their loan commitments, they could not be asked to take over complete burden of private banks.

"If you were taking loans from private banks earlier and now want the government banks to support you, because private banks are not honouring their commitment, it could not be possible in all the cases," the official said.

He said the government had asked the bankers that if they have given credit for a part of project, they should not stop lending for the remaining part of that project.

"In fact, much cannot be done if the borrower has defaulted on earlier obligations or if the creditworthiness has eroded," the second official said.

The proposal will also include providing loans at below market rates to real estate developers. But the loan disbursed under this will come with a number of conditions like an upper ceiling on selling price of flats and individual homes.

The threshold limit for loans is likely to be around Rs 10 lakh, as it was estimated that nearly 75 per cent of the housing loans were below Rs 7.5 lakh. Only developers who have land in their possession or already in the middle of a housing project would be eligible for the government subsidy. Individual planning to construct homes on their own would also be eligible, said an official.

The panel of secretaries headed by Finance Secretary Arun Ramanathan has advised the urban development ministry to prepare a note in this regard and present it to the apex committee headed by Prime Minister Manmohan Singh.

The final decision on the proposal will be taken by the apex committee.

So to avail a home loan, one needs meet certain requirements laid down by the lender. Prior to apply for home loan, it is important that you have your credit report from the credit reporting agencies. Make sure you have a report with good credit score. If you are unable to provide a copy of your credit report then you may be disqualified for your home loan in the very first stage.

The down payment is an important part of your home loan and therefore you should be sure that your bank has sufficient funds to make the down payment. Down payment is some percentage of the home loan that the borrower has to bring himself. The bank never lends 100% of the loan amount. Also you should calculate the EMI that will have to pay if you plan to avail a loan of certain amount. In India rupeetimes.com provides you the best EMI calculator for your home loan. Generally your income should amount to at least three times of the calculated EMI and in case it is less than this, it may get tough for you to avail a loan. All your dues including car payments, credit cards bill etc are deducted from your income to arrive at the amount available to spend at the mortgage.

There are other hidden that go hand in hand with the home loan. In case your down payment is low then it is mandatory to have a mortgage and home owners insurance. Also there are property taxes that differ from state to state and home owner's association fee that depend on the location of the property. On the other hand if you make a large down payment then the lender does not insist you on any kind on mortgage.

To avail a home loan you should be able to prove that your adequate income to make a good living. You are required to display your bank statements and ensure the lender on the stability and continuity of your employment. The higher is your disposable income the higher amount of loan you can get.

Ashish Wagh, a senior executive with a foreign investment bank, re cently approached his mortgage lender for a lifeline after his company started cutting jobs and trimming salaries.

Wagh had taken an Rs80 lakh home loan earlier this year to buy an apartment in Bandra, a Mumbai suburb, repayable over 20 years at an annual floating interest rate of 11.75%.

Wagh is now considering selling his ancestral property in Pune so that he can immediately repay nearly half the loan amount and avail a two-year moratorium--a legal authorization to delay payments.

He declined to name the mortgage firm because he said that could hurt his negotiations with it.

As interest rates surged earlier this year and companies started laying off staff and tightening employee costs, recovery teams of banks and housing finance firms have, in the past few months, been busy offering at least half a dozen easy repayment solutions to a growing number of borrowers who have been hurt by the slowdown.

Lenders are open to offering easier terms to existing borrowers because they want to prevent an increase in the proportion of non-performing assets (NPAs) on their books and the worth of their collateral--the houses--has declined sharply this year with falling real estate prices.

Banks have extended home loans worth about Rs2.69 tril lion as on 29 August, but growth in home loans between 1 September 2007 and 31 August slowed to 13.9% at Rs32,792 crore, from 17% in the previous year, according to the Reserve Bank of India.

Interest rates on home loans have increased from 7.50% in 2003 to 11.75% in August, putting pressure on borrowers who had taken loans at floating interest rates.

For instance, if a person had taken a Rs20 lakh home loan repayable over 20 years, his monthly repayment would have increased from Rs16,418 in November 2004, when the interest rate was 7.75%, to Rs21,674 now.

Housing Development Fi nance Corp. Ltd, or HDFC, the oldest mortgage lender in the country, is offering its existing borrowers the more common options of stretching the term of the loan without raising the interest rate, or increasing the equated monthly instalments after closing other debts such as personal or auto loans.

"There is a 75 basis point reduction in the interest rates on home loans. This will drive demand. The bank would focus more on home loans between Rs 10 lakh and 15 lakh as it would definitely help profitability," said RS Reddy, CMD, Andhra Bank.

According to Renu Challu, MD, State Bank of Hyderabad, the recent reduction of capital requirement for home loans by the RBI would also facilitate aggressive lending by banks. "Definitely, there will be a big push. SBH will also push home loans below Rs 20 lakh and 25 lakh aggressively. It is a priority sector for us," Challu said.

Meanwhile, many other banks have also identified housing loans as a priority.

"To regain the momentum, there should be a little effort from the builders' lobby as well. They had taken the prices to unaffordable levels which should be brought down," Reddy said.

There is a talk of some builders offering special discounts and bringing down the prices to push the demand up, Reddy added.

The builders, on their part, are happy with renewed interest of banks in housing loans. "The coming down of home loan rates will be beneficial for the end-users in buying properties at a better price. The developers will also be benefited as it will reduce lending cost," said a spokesperson of real estate major DLF.

According to RBI data, the loan growth in the housing sector decelerated slightly in the second quarter of the current fiscal year. They grew at about 14 per cent (Rs 32,792 crore) up to August 31, 2008 compared with Rs 34,333 crore in the year-ago period.

With the removal of price controls on insurance covers on fire, engineering and motor vehicle since January 2007, non-life insurance companies entered into a price war offering huge discounts ranging from 50 to 75 per cent on property covers and 20 to 40 per cent on cover against damage to self-owned vehicles. The motive was to retain their existing customers and grab new customers. However, these rates have been unsustainable and insurance companies are likely to post losses this year.

There are two types of motor insurance covers. One is third party insurance, which covers for damage to third party property, death or injury in accidents, etc. This cover is mandatory under the Motor Vehicles Act.

The other part of motor insurance is motor own damage cover that is the insurance cover against damage to self-owned vehicles. Insurance companies offer discounts of up to 40 per cent on own damage covers.

"The insurance industry has suffered a loss of more than Rs 1,000 crore on group health insurance policies in 2007-08," said Sandeep Bakhshi, MD and CEO, ICICI Lombard General insurance. "A minimum 30 to 50 per cent rise in premiums for group health covers is inevitable. Discounts of 20 to 25 per cent being offered on motor own damage covers also need to be rolled back."

According to industry officials, the motor third party pool has a deficit of Rs 700-800 crore for 2008-09.

The country's banking industry is set to witness a big rise in non-performing assets (NPA) - which means loans on which payments go missing because India Inc's 30 per cent decline in net profits in the July-September quarter signals an imminent rise in default rates, say industry insiders.

Bankers told Hindustan Times that they began to see default rates inching up from September.

"We are yet to see the worst. Corporates have shown signs of non-repayment and though a clear picture is yet to emerge, the going may become tougher for banks in the next few months," said a senior official at a private sector bank.

The total number of loss-making firms has also increased by about 30 per cent in the second quarter of the current fiscal as compared to the previous fiscal.

At present, the NPA level is about net 1-1.5 per cent - which means less than one in 50 loans or equivalent in loan amount fail to be repaid beyond a defined acceptable level of defaults. An account is classified as NPA if the repayment process of the outstanding amount does not start within 90 days.

In the last couple of years, banks public and private - have been able to reduce their level of bad assets due to robust recoveries. "Howevel: recoveries will be dismal with corporates registering their worst performance in a long time," another banker said.

A large number of small exporters have already started defaulting after they suffered a loss of over Rs 2,000 crore on account of the collapse of the forex derivative market. Banks have been directed by the Reserve Bank of India to transfer the bad assets into a separate account and carry on with lending.

Banks have indicated that they will not stop lending.

INDIA'S BANKS are accumulating bad and doubtful loans at a faster pace as the economy slows, and the trend may accelerate next year as small and medium enterprises, or SMEs, and households struggle to pay debts, bankers and economists say.

A Mint analysis shows that in the quarter ended September 30, the combined gross non-performing assets (NPAs) at the top 10 banks by market capital rose 7 per cent from the preceding quarter to Rs 35,290 crore. The pace quickened from a quarter-onquarter rise of 1.25% to Rs 32,982 crore in the preceding three months.

Year-on-year, the gross NPAs at State Bank of India, ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank and Union Bank of India shot up 14.5 per cent.

As most public sector banks including State Bank of India, Punjab National Bank, Canara Bank have reduced their benchmark prime lending rates (BPLR), home loans are expected to get cheaper in the coming times. Bankers feel that home buyers should take advantage of this low interest regime that is likely to prevail in the economy.

Syndicate Bank's General Manager, B.R. Pai said, "We expect our home loan off take to increase by 22 percent y-o-y next quarter with the fall in interest rates." The bank faced a fall in its growth of home loans during the last quarter. In the last quarter growth of home loans disbursed by Syndicate Bank were only 18% against a 30% growth for the same quarter, a year ago.

There is an unexpressed demand for residential property that is going to increase the demand once liquidity crunch in the segment is resolved, said Kumar Gera, Chairman of the Confederation of Real Estate Developers' Associations of India (Credai).

C Abraham, General Manager of Union Bank feels that as the property prices are falling in the recent times, more genuine buyers will come to take home loans and therefore the home loan disbursals will rise.

"Even Union Bank has been given a mandate by the board to make property purchases for housing our staff and for long term investment purposes. Valuations are down considerably from ridiculously high levels," he said. The bank has cut its home loan rates by 50 basis points to 10.75%.

The recent measures by RBI to infuse liquidity into the system have helped to view a positive reaction in the market. Vijaya Bank's CMD, Albert Tauro said, "Demand waned for our home loans in the last few months. This is the right booster that we were looking for our home loan segment." During the last quarter home loan portfolio of Rs 4,000 crore grew by only 7%.

A.C. Mahajan, CMD, Canara Bank beleives that home loan portfolio of banks which have been falling will see a revival due to the rising demand that is likely to come in from risk-averse people.

However, an SBI official said that home loans disbursal in SBI may not see a huge increase. "Loan applications of people from sectors like IT which are seeing layoffs are being more carefully scrutinized to avoid defaults," the official said.

The largest lender, SBI will still move cautiously under the tough economic conditions that are ongoing in the system, added the official.

Chairmen of top government-owned banks said that they would continue to adhere to the stringent norms while lending to real-estate developers. Bankers are of the opinion that RBI has not changed the risk weightage of the realty sector and hence they would continue to follow the earlier norms.

Some of the norms that public sector banks have been following while lending to real estate developers include taking securities twice the amount of loan required. Since sales for most realty players have come down, they do not have enough capital and thereby securities to fulfil all criterion.

"We will continue to apply same norms while deciding on the loans to realty companies. The demand for home loans has also come down due to higher prices. Unless realty firms bring down prices of properties, not much is going to change even after the interest rates cut," said HA Daruwalla, chairman and managing director, Central Bank of India.

MD Mallya, chairman and managing director, Bank of Baroda, echoed the views. "The line of credit likely to be given to National Housing Board (NHB) does not mean a shift in policy by the apex bank as all norms for the sector remain unchanged. Therefore, we would continue to follow same yardsticks. But, if someone fulfill the entire criterion, we would definitely lend him," said Mallya.

Finance minister P Chidambaram announced on Tuesday that the Reserve Bank of India had agreed to provide a Rs 10,000-crore special line of credit to NHB. This is expected to ease the flow of credit to buyers of homes, which in the long run would boost demand for dwelling units by brining down the lending rates.

S Sridhar, chairman and managing director, National Housing Bank said, "The line of credit would ease the lending rates. We have not yet finalised the operational modalities of the line of credit. However, the NHB refinance to the housing finance companies is expected to lower their cost of funds and ultimately help them to lower their lending rates."

Meanwhile, a day after their meeting with the finance minister P Chidambaram, public sector banks have started reducing their lending rates. Bank of India has cut its prime lending rate by 75 basis points to 13.25 per cent with effect from Thursday. The bank also plans to cut the interest rates on deposits by 50 bps across all maturities with effect from December 1.

"Every two weeks, banks will report on the industries that are receiving loans for a better understanding of credit delivery," the minister said after a meeting with the chiefs of state-run banks. This will ensure equality in the distribution of credit among sectors, he said.

The minister today announced that the credit guarantee on loans would be enhanced to Rs 1 crore. Credit guarantee is a government surety on all loans advanced by state-run banks to the small-scale industry and micro finance institutions.

Chidambaram said enough liquidity had been infused into the financial system and commercial banks would now step up credit delivery at the right price.

Housing finance companies (HFCs) may finally get some relief, with the National Housing Bank (NHB) considering various options for increasing their access to cheaper finance.

Sources close to the development said these measures include allowing the HFCs to access funds through external commercial borrowings. NSB is also considering a separate window for lending to these companies at a cheaper rate.

The maximum amount a company could raise through ECBs would depend on the net worth of the company.

Last week, RBI allowed banks to raise money through a special window to on-lend to non-bank financial companies (NBFCs), before allowing systemically important non-deposit-taking NBFCs to raise capital through Perpetual Debt Instruments that would be a part of their Tier-1 capital. As a temporary measure, RBI also allowed these NBFCs to raise short-term foreign currency borrowings to the tune of $10 million under the approval route.