Home loan firms in no mood to cut rates

In the last few weeks Public sector banks have announced of lowering home loan rates after a slew of measures by the Reserve Bank of India (RBI), but housing financial companies (HFCs) are yet to take decision on the issue.

According to HFCs the cost of funds is showing no signs of reduction since 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, the two big house financing companies together account for over 70 per cent share of the HFC market and charge around 11.5 per cent, whereas 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.

HFCs sources said the high cost of funds has affected their ability to compete with public sector banks because the weighted average cost, on an average, is 300 basis points higher. Nair added on the contrary, lending rates are 50-100 basis points higher than those of public sector banks.

“We are lending to NBFCs at about 13 per cent, which will not come down as we consider it as a high-risk sector,” said an executive of a large public sector bank.

As per the industry approximate calculation, HFCs comprise over 40 per cent of the Rs 1,20,000-crore housing finance market. According to executives of these companies said HFCs will now account for 15 per cent of an increase in the pie as against 25 per cent in 2007-08.

Recently the National Housing Bank (NHB) had even raised the refinance rate to up to 12 per cent from around 9 per cent which also did not help the cause of HFCs.

In the current circumstances the bigger players, backed by strong background, are still finding difficulty to sustain the higher cost of funds, thus their smaller peers are finding it even more tough to operate.

“The recent measures by the regulators have not translated into the availability of credit from banks. We operate in the lower-income group, with an average loan ticket size of Rs 6-6.50 lakh with a very low margin. So, if things do not improve soon, we will be left with no choice, but to increase lending rates,” said Dewan Housing Finance Vice-Chairman and Managing Director Kapil Wadhawan.

Wadhawan confessed that in the current year, the distribution growth has slowed down compared as compared to the last year.

“The real estate market is reeling. So, the demand is bound to come down. But, we hope to grow at around 18-20 per cent in incremental disbursement this year compared with over 25 per cent growth last year,” he added.

LIC Housing Finance giving loans to builders

The expectations have grown high regarding the downward slope in the interest rates of home loan after the cut in repo rates. Therefore LIC Housing Finance is distributing more loans to builders/developers who comprise to 6% of their business as against individuals which frame up to 94% of their business.

R.R. Nair, director and chief executive, LIC Housing Finance informed that, “We are supporting the builders and developers by funding their upcoming projects to support individuals to afford real estate properties. This will, in due course, result in escalating business in our home loan segment”.

According to latest reports builders are now negotiating prices with buyers, though they are still refusing to reduce property prices officially. LIC Housing is offering easy and hassle-free loans to builders (for new projects) with an aim to encourage builders to reduce prices to a reasonable level.

The main idea behind the move in focus is to encourage individual buyers to book properties. The objective is clear in the loan disbursement target set by the company for the current fiscal. By the end of the current fiscal the company plans to distribute Rs 8,000 crore in home loan segment and Rs 2,000 crore loan to builders, as against Rs 5,900 crore and Rs 1,200 crore respectively in the last fiscal 2007-08.

Up till now, LIC Housing has distributed Rs 5,000 crore, of which Rs 500-Rs 600 crore has been given to builders. Furthermore, it has already sanctioned Rs 6,000 crore loans for which disbursement is due.

In the words of Mr. Nair, this strategy can originate as “loan on tap”. “When we give loans to builders, we also make soft approach to their buyers to take home loans from us. The builder himself shows the way, although it is not a compulsion for the buyers,” he explained.

LIC Housing will be providing funds to builders in all projects sizes--big, medium and small. As per information available from sources it has allocated funds to real estate projects of Rajeha Builders, Sheth Builders and is also in the process of loaning money to Sriram Builders. But Mr. Nair refused to comment on these developments.

While distributing loans in this distressed economic situation, LIC Housing is taking certain precautionary measures. At present company is funding estate projects mostly in groups with other financial institutions like HDFC, SBI, Punjab National Bank, Axis Bank, Central Bank. “This strategy was framed to distribute the risk factor, especially in this downturn market. In a big project of Rs 2,000 crore, if all institutions contribute partly, the risk factor is mitigated on pro-rata basis,” Mr. Nair said.

The company also makes sure that the asset value of the securities given by the borrower as collateral should be twice the loan value. Thirdly, it is carefully examining the cash flow of the builders keeping in mind of the current depression. LIC Housing also do the study of the neighborhood to determine the rationale for pricing a property.

Banks directed to set up Entrepreneurship Development Institutes

The State government is focusing on the self employment of the youth and has asked the banks that are having more than 15 branches in the state should set up the Entrepreneurship Development Institutes (EDIS) in line with the Rural Development and Self Employment Training Institute (RUDSET Institute). The official sources said that the banks that have not opened their EDIs should speed up the process of setting up a similar institute in the state.

The State Bank of India (SBI), UCO Bank, Andhra Bank, Canara Bank and Syndicate Bank have set up such institutes; Union Bank of India has started the process of setting up a similar institute in the state.

The banks that have not yet opened their EDI have been instructed to set up such institutes in the rented premises without further delay. They can also look for land/shed/building in the districts where they propose to set up these institutes.

In the recent meeting of the State Level Bankers’ Committee (SLBC) held in October it was discussed that the interested banks will have to apply to the collector of the concerned district through the District Industries Centre (DICs).They can take support or assistance from the National Bank for Agriculture and Rural Development (Nabard) and involve it in the process while opening such institutes.

Further, in the situation of insufficient finance with the micro, small and medium enterprises (MSMEs) in the state, the banks have been instructed to improve credit flow to the sector. The pending applications for loans under MSME category will be cleared off at the earliest.

In addition banks have been directed to take maximum advantage of the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) as it helps the entrepreneur to get collateral free loans up to Rs 50lakh. It is being expected to boost the finance under SME sector.

The SLBC has formulated a plan of action to improve the credit-deposit ratio in the state and also to increase the quantum of differential rate of interest (DRI) loans to 1 percent of the total advances.

According to the plan of action, the cent percent financial inclusion of Kendarapada, Koraput, Kandhamal, Kalahandi, Nuapara, Baragarh, Jharsuguda, Jagatsinghpur, Bhadrakh, Balasore, Dhenkanal, Mayurbhanj and Gajapati would be completed at the earliest and for the entire state the process must be completed by 2009.

Whereas the banks who have accepted the handloom clusters must extend necessary finance to those clusters, and the banks who have not yet adopted the clusters must which adopt the clusters which have been identified by the textile and the handloom department of the Orissa government.

Further more, to boost crop production in the state, banks have been asked to finance the schemes related to farm mechanization, Jalanidhi program and other subsidy linked scheme sponsored by the agriculture department of the Orissa government.

Home prices to cut by 25% this Diwali

There is good news for people who still have plans to buy home that most realtors are advertising cash discounts of 5-10 per cent on upfront payment and buyers can get up to 25 per cent discount if they book properties and can wait for two to three years until possession. Consultants are of view that developers might even give 15-20 per cent discount on the price as they are eager to clear inventories.

Generally, the October-December is the period when the sale accounts to around 60 per cent. But this year the developers are under tension due to sharp decline in property sales. Since the beginning of the year, home sales have halved due to high interest rates and a sharp rise in the monthly loan payouts of borrowers.

Recently a national poll was conducted among top property brokers by Mumbai-based brokerage Edelweiss Securities, in which nearly 90 per cent said they have seen a drop in transactions in the last one month and almost 80 per cent have witnessed a reduction in enquiries during the same period.

Oberoi Constructions had planned to launch a 300-apartment complex called Oberoi Island in the Goregaon suburb of Mumbai during Diwali. The realtor was considering offering apartments under construction, which were expected to be completed in two years, at Rs 9,000 per sq ft from the current price of Rs 12,000 per sq ft.

Some of the developers such as Mumbai-based Sunil Mantri Realty are more honest about the price cuts, as there company has already advertised a 6 per cent discount for its 206-apartment complex Mantri Royale in Bangalore, was launched last Thursday. The company will be selling flats at Rs 2,590 per sq ft, instead of the normal Rs 2,750 a sq ft, for the next 15 days and is planning to extend it further, depending on the buyers’ response.

Mantri Realty is also planning to give similar offers at its upcoming projects at Gwalior in Madhya Pradesh and Solapur in Maharashtra, slated for launch in the second and fourth week of October respectively.

“It makes much more sense to give discounts and waive off stamp duty to persuade customers to buy apartments when the market is facing a slowdown. Every buyer demands a little more for his money and we are doing that,” said Sunil Mantri, promoter of Sunil Mantri Realty.

In view of sharp decline in property sales, the Maharashtra Chamber of Housing and Industry (MCHI), a trade body of realtors, has already directed its members to bear the stamp duty charges and pay a part of the interest cost on loans in order to improve the declining sales.

In the National Capital Region (NCR) of Delhi too, where price alteration was deeper than Mumbai, developers are giving out discounts to attract customers. Delhi-based Pearls Infrastructure is also giving 6 per cent discount on down payments in its Nirmal Chaaya Tower at Zirakpur and has announced 8 per cent discount in the Pearl City project at Mohali in Punjab.

However big developers such as DLF, Ansal API, Parsvnath Developers and Raheja Developers have not yet advertised discounts, they are launching their new projects, for the mid-income segment during Diwali to attract buyers in the mid-income segment.

"We want to launch our projects during Diwali because properties launched at this time get better response. At a time when sales are down, Diwali comes as a major sentiment booster for developers as well as customers," said Dimple Bhardwaj, spokesperson, Raheja Developers, which is launching a 412-apartment project at Gurgaon.

Whereas some realtors and consultants are of view that the discounts and offers will not help improve property sales since home loan rates are high and property prices are out of reach of ordinary buyers.

“This Diwali will not be like that of previous years. The current market sentiment is down and the developers are feeling the heat. I do not think that the discount offer of Rs 1-2 lakh will make a customer buy an apartment that costs more than his pocket,” said Anshuman Magazine, managing director, property consultancy CB Richard Ellis.

Akshaya Kumar, MD of Park Lane Property Advisors, added, "This Diwali will be a damp squib for the property market. Only in 2010, developers can do some good business. Developers may offer 5-10 per cent discount this time depending on their strength,'' Kumar says.

Prakash Gurbaxani, founder and chief executive of Bangalore-based QVC Realty, points out competitive pricing is the key to sell property than discounts. QVC is launching its 100-villa project QVC Hills, with each villa costing Rs 2-4 crore, in Bangalore during Diwali. "Nobody will wait for a Rs 5 lakh discount to buy a Rs 2 crore house. You have to price the property right and product should be good,'' he said.

Banks to offer Diwali bonanza by cutting home loan rates

The creditworthy borrowers can look for Diwali bonanza to be offered by many commercial banks that are planning to cut home loan rates by about 50 basis points after RBI has announced cut in repo rate on Monday.

the State Bank of India (SBI), country’s largest lender will probably will be reducing retail home loan rates before Diwali whereas Punjab National Bank (PNB) and Union Bank of India (UBI) have already cut rates by up to 50 basis points. But all types of loans might not carry the rate cut of 50 basis points.

On the other hand the private home loan providers like HDFC and ICICI have plans to adapt the wait and watch policy, a rate cut by market leader, the SBI, often has a ripple effect on many banks. UBI has cut rates by 50 basis points for loans up to Rs 30 lakh.

The rate cut for loans above Rs 30 lakh, however, will be only 25 basis points. Also, there is the possibility that for loans amounting to Rs 75 lakh and above, the rate cut may be even lower. Sources say some banks may even decide against cutting rates for loans above Rs 75 lakh.

While many banks, including SBI, have set a new ceiling of home loans above Rs 75 lakh; they have laid down a different rate structure for these loans. However the government recognizes only two types of home loans, those below and above Rs 30 lakh. However the former comes under priority sector lending. Moreover, rate cuts will not be applicable to commercial borrowers like real estate companies.

“Our bank is contemplating a rate cut following the recent measures taken by the Reserve Bank. Though the decision to reduce rates may come at any point in time, it’s expected that the bank would take a decision after seeing RBI’s half-yearly monitory policy on October 24,” an SBI official said.

Banks are also following some tough norms. He informed that the bank is following strict norms while deciding an individual’s creditworthiness for allocating loans so that the bank do not have to face the subprime-like situation.

Meanwhile according to finance ministry sources the government is in constant touch with commercial banks to ensure easy liquidity for priority sector loans.

“The government and the central bank have taken a series of measures to infuse liquidity into the system and there is no reason that the banks should be wary of providing credit to genuine borrowers even after that,” an official said.

Banks slowdown on loan disbursal, both retail and corporate

Banks have slowdown the disbursal of loan, both retail and corporate due to shortage of funds. Banks are distributing loans on selective basis and holding back the fund commitments to corporate customers. Bankers pointed out that banks are asking for higher margins and more security against the loans, in loans to sensitive sectors.

A senior official from State Bank of India said the bank is monitoring loans for big projects more carefully, especially real estate loans, for which the bank is asking for higher margins and greater security. “We are being careful about big projects and are examining various parameters, because we are dealing with a scarce commodity,” he said, referring to the cash crunch.

He added but no reduction has been done in retail loans such as housing loans and car loans and loans to SME and agri sectors.

Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, pointed out that the liquidity crisis in the financial markets is also responsible for driving banks to hold fund commitments to corporate customers.

“With inter-bank call rates going as high as 22 per cent (for temporary liquidity) how can we lend at 15 per cent? So, big corporate customers are being told to wait,” he said.

Mr Romesh Sobti, Managing Director and CEO, IndusInd Bank, also stated that banks have stopped lending. “Lending is down to a trickle in whatever form it is,” he said.

Ms Renu Challu, Managing Director, State Bank of Hyderabad said though there is no respite in applications for funding projects or working capital from the corporates, but there has been decrease in the disbursal due to lack of liquidity from the banks’ side.

“There is no halting of lending, but it has been put on hold in some cases. And, till recently, RBI actually wanted this to tame inflation. However, now with the inflation coming down and RBI sending signals about increasing liquidity, the situation should improve,” she said.

While Mr S.K. Goel, Chairman and Managing Director, UCO Bank, pointed out that banks have not stopped lending, people have started withdrawing deposits more out of panic.

Mr K.R. Kamath, Chairman and Managing Director, Allahabad Bank stated for banks to get short-term money is a costly to affair when the cost of funds moving up significantly. “Banks are facing problem raising short-term funds, therefore, there has been some slowdown in credit disbursements on a short-term basis,” he said.

Mr V.K. Dhingra, Executive Director, UCO Bank, stated that banks are finding lending operations difficult in view of tight liquidity conditions. “There has been some slowdown in short-term lending operations of banks,” he observed.

Mr T.M. Bhasin, Executive Director, United Bank of India said, “There is a demand from the corporate side, liquidity was the only constraint. The present cut in CRR will hopefully enable banks to extend short- term advances.”

According to Mr Deepak Khaitan, Chairman, McNally Bharat Engineering Company Ltd said that on the corporate borrowing front, companies are holding back their decisions to raise funds. “The CRR cut will help infuse some money into the system; however, there seems to be little improvement in the interest rate situation which continues to remain high. We are therefore cutting down our borrowings and repaying our debt in order to reduce the burden,” he said.

Regarding the loans against shares bankers said many of the banks are asking for higher margins or selling shares.

Mr Sobti pointed out, “There are no broker defaults, SEBI has stated this. However, there are small cases of defaults when margin calls are not met. In such cases, shares are being sold by the banks”.

“Due to RBI’s strict restrictions and timely advice on exposure to capital market and commercial real estate, there have been no broker defaults so far. We have been charging slightly higher on loans due to the liquidity crunch,” Mr Goel said.

Arcil acquired distraught consumer loans in housing and auto segment

Arms is an innovative project of Asset Reconstruction Company of India Ltd (Arcil) has recently got hold of over Rs 1,200 crore worth of unpaid consumer loans in housing and auto segments. The main recovery is of housing loans segment of Rs 1,000 crore given by National Housing Board and ICICI Bank. Currently Arcil is having around Rs 10,000 crore sticky assets which it has acquired from other banks and financial institutions during the last three years of time.

S Khasnobis, managing director and CEO, Arcil, said, “This is the first time that an organized pan-India attempt is being made to recover distressed consumer retail loans. Arms would focus on resolution through dialogue and borrower co-operation, thereby fostering the culture of responsible borrowing and repayment.”

Khasnobis said the resolving strategy adopted by Arms for retail assets will be quite different from Arcil corporate assets’ recovery practice Recovery solution for retail loans segment is carried out after the thorough assessment of the borrowers’ paying capacity and the values of the collaterals. On the other hand, the company will not get hold of unsecured loans like credit and personal loan. “Though we would acquire them, at a much later stage, we will have to deal with them indirectly as it may involve the same borrowers. We will try to work out a resolution for retail assets,” he said.

Arcil’s latest proposal seems to be significant as a rough estimate by Crisil puts the size of bad loans in the retail segment to around Rs 15,000 crore as on March 31, 2008. This amount includes both housing as well as auto loan defaults in the country. Bankers are of view that in the current fiscal the delinquencies in home and auto loan portfolios might rise further because rise in the interest rates, after the regulators have taken strict steps in its latest monetary policy in order to control the rising inflation. As per the figures released by the Reserve Bank of India, as of May 2008, the total unpaid housing loans in India are estimated at Rs 2,62,486 crore.

Union Bank to provide loans for low cost housing scheme for slums

Union Bank of India the public sector will be providing loans towards the beneficiary contribution in the low cost housing loan scheme planned for the urban poor in Bhubaneswar and Puri.

Under the low cost housing scheme project the houses will be built for the slum dwellers in these two cities under the Integrated Housing and Slum Development Program (IHSDP) being executed in Bhubaneswar and Puri municipality. Under the scheme, the Union government will be providing 80 percent of the project cost as grant and the remaining 20 percent will be shared equally by the state government and the beneficiaries. The Union Bank will be giving loan to the beneficiaries towards meeting their contribution in the project, if the beneficiaries want it.

A senior bank official informed that bank will be giving loan to the urban poor and slum dwellers under JNURM at 4 percent differential rate of interest (DRI).

A Sudhakar, DGM, Union Bank in an interview told the Business Standard "We have in principle agreed to provide loans for the low cost housing project under IHSDP for urban poor and slum dwellers being implemented by the Bhuabneswar and Puri municipalities. It is in the initial stage and we are working out the modalities for the proposed initiative".

He said, the bank will give loan at 4 percent rate of interest for construction of houses in these two municipalities.

However the state government will be looking after the activities like identification of the land, preparing the list of beneficiaries, inviting the bid and construction of houses, banks role will be limit to of providing required loan for the beneficiaries.

The beneficiary will have to pay back the loan to the bank within a set time frame of not exceeding 10 years and the bank will be keep the house mortgaged till the loan is cleared.

The bank will file the request for the approval from its corporate head office after the project details of the scheme are obtained from the state government.

Orissa will be the second state after neighboring West Bengal where the bank is extending loans for a housing scheme for the urban slum dwellers. Earlier bank has supported a similar project in Durgapur in West Bengal in the beginning of the current fiscal.

The progress seems to be important as the state government has received the signal from the Union government that the number of houses projected under IHSDP is most likely to increase substantially this year from about 11,000 last year.

FM advised public sector banks not to raise home loan rates in chief’s meet

Finance Minister P Chidambaram in a meet of chiefs of public sector banks has advised the public sector banks not to increase interest rates for home loans up to Rs 30 lakh and lend more to consumer’s even as the Reserve Bank of India is trying to moderate credit growth to contain inflation.

After the meet Chidambaram told the reporters, “(Responding to the monetary policy) Public sector banks have increased their benchmark prime lending rates by 75-100 basis points. Banks have said almost unanimously that it will not impact existing home loans up to Rs 30 lakh, auto loans and education loans”. According to sources banks have been advised by the minister not to raise interest rates for new home loans up to Rs 30 lakh also.

Sources added Chidambaram also requested the banks’ chiefs to increase disbursement of auto loans as well as personal loans by keeping interest rates affordable.

Taking indications from the North Block, most of the banks already have not touch interest rates in the above categories. Some banks such as the Punjab National Bank, which has raised interest rates for existing borrowers in these categories, but has given the assurance that they will re consider these portfolios.

After taking opinion from banks, Chidamabram said credit growth will be rapid this year. He indicated that advances are likely to grow by over 20 per cent, while deposits can be more than 17 per cent.

RBI has hooked the credit growth at 20 per cent and the deposit growth at 17 per cent for the banking sector in 2008-09. “Deposits are growing at a satisfactory rate compared to last year. Advances are higher compared to the last year (in the first quarter),” Chidambaram said.

Most banks have expressed that they are not witnessing any slowdown in credit demand. But, there has been no growth in farm credit due to the relief scheme.

Banks hike floating home loan rates

HDFC and ICICI Bank are the two largest housing finance lenders in the country, have hiked their floating home loan rates by 0.75 per cent, which means a predicted over 12 percent of increase in the overall repayment.

ICICI Bank, biggest private sector lender of the country, has also increased the interest rate for retail fixed deposits by 0.75-1.00 per cent, which will come into effect from August 1.

In addition, bank has also increased its floating reference rate for consumer loans, including for housing by 0.75 per cent with an immediate effect.

Individually, HDFC informed that it has revised its retail prime lending rate on which adjustable home loans rate are benchmarked by 0.75 per cent, will be effective from August 1. With this hike, the floating rate home loans will cost at a minimum of 11.75 per cent for new HDFC customers, meanwhile bank has not touched the fixed rate which remains at 14 per cent.

While ICICI Bank sources said that the revised floating reference rate for its consumer loans will increase to 14.25 per cent, which are 13.5 per cent at present.

ICICI bank sources said fixed rate loans for its customers have been left unchanged. Although bank has announced a hike of 0.75 per cent in its benchmark advance rate, which would now increase to 17.25 per cent from 16.5 per cent currently.

The hike in floating reference rates by the banks means consumers will have to now take out over Rs 1,000 more every month as EMI for a loan of Rs 20 lakh, whose repayment is spread over 20 years. Yesterday few of the banks had announced hike in rates and others are expected to soon follow suit.

Hence on an 11.75 per cent floating rate, the EMI is estimated to work out to around Rs 21,675 per month, up Rs 1,031 from Rs 20,644 at a rate of 11 per cent. This is going to increase an overall additional burden estimated to Rs 2, 50,000 over the 20-year period.

Banks are revising rates in the wake of tight monetary measures announced by the RBI on Tuesday, when it asked the banks to maintain higher mandatory cash reserves with it and also increased its short-term key lending rates for them.

IDBI Bank, another private sector bank has increased its benchmark prime lending rate (BPLR) by 0.50 per cent to 14.25 per cent. As per bank release the increase will come into effect from August 1.

Yesterday Axis Bank hiked its PLR by 0.5 per cent to 15.75 per cent, which came into effect from July 31, while Jammu & Kashmir Bank has hiked its PLR by up to one per cent.

In order to tighten liquidity in the banking system to counter inflation, the apex bank has hiked the short-term inter-bank lending rates (repo rate) and mandatory cash reserve (CRR) by 0.50 per cent and 0.25 per cent, respectively.

According to experts in the coming years home loans can get costlier again as the RBI is expected to further tighten its monetary policy with additional CRR and repo rate hikes.

Other private-sector lenders Bank of Rajasthan (BoR) and Yes Bank has also hiked their BPLRs today by one per cent and 0.5 per cent to 16 per cent and 17 per cent, respectively.

NHB prepares mechanism to buy banks’ home loan portfolios

The National Housing Bank (NHB) is preparing a mechanism under which it has plans to buy housing loans from banks and housing finance companies (HFCs) and in turn it will provide liquidity and free up capital to these lenders. On the successfulness of this plan the housing finance market will be able to breathe easy as far as liquidity is concerned. NHB will be providing securities on the loan portfolios and sell the papers to institutional investors like banks and insurance companies.

In an interview to ET NHB executive director RV Verma said this is the first time NHB has planned to start such scheme. He said, “This is a new initiative which will provide liquidity to lenders and free up capital. This will ultimately channel more resources to the housing finance sector. This will also ease pressure on home loan interest rates.”

He explained the working of the structure. NHB will be holding purchased assets in its balance sheet for advance securitization. In this process, the portfolios will get more tested with NHB. It means NHB will work as a warehouse of mortgage assets need to be securitized and then will be sold to investors without diluting the standard of the assets.

On Monday a meeting was held between NHB brass and the lender in which the decision was taken to develop this new liquidity window. NHB will be providing this facility in parallel with the usual refinance window.

As indicated by preliminary discussions, the apex housing bank will be buying only the standard assets which are having low risk weight age. Loans which are less than or equal to Rs 30 lakh will be eligible for this arrangement. “We would like to buy loans which have minimum seasoning of at least six months,” Mr Verma said.

After the amendment in Securities & Contracts Regulation Act securitized instruments can be traded and this has given an added flexibility to the securitized market. “The seasoning of assets and trade ability will help fetch a good price for the securitized assets,” Mr Verma said, further adding that this whole exercise of securitizing will in turn help NHB continue funding over and above the exposure limit to individual entities.

Banks hike home loan rates HDFC, ICICI hike by 75 bps

Inflation has already stretched everybody’s household budget. Now the banks are hiking interest rates on home loan which is going to further strain the budget as they have to reduce their spending to pull out more for EMI.

HDFC home loan market leader announced an increase of 50 basis points hike in interest rate for all its existing borrowers with floating rate loans. But for the new borrowers the increase will be around 75 basis points on floating as well as fixed rate loans.

After this increase the new customers will have to pay Rs 1,033 for every Rs 1 lakh as EMI on a 20 year loan. While for the existing floating rate customers EMI will increase by Rs 34 for every Rs 1 lakh loan with an outstanding tenure of 20 years.

Therefore after the revised structure the floating rate for new borrowers will be 11% and fixed rate 14%. The same level was last seen in the mid 90s. The hike in rates will be effective from July 1.

Along with HDFC the country’s second – largest bank, ICICI also announced a 75 basis points hike in the fixed as well as floating home loan interest. After this hike there will be 14.75% increase in the fixed loan interest perhaps the costliest in the sector.

Country’s largest public sector bank State Bank of India (SBI) will also be raising interest rates on home loans and auto loans by 50 bps on all linked to prime lending rates (PLR). SBI has increased PLR from 12.25% to 12.75% last week due to the increase in short-term lending rate to banks and the mandatory cash deposits that banks need to keep with the apex bank (CRR) by 50 bps each by the Reserve Bank of India. Punjab National Bank has also increased its PLR by 13%.

After the increase in PLR by the banks the households are now left with higher returns on deposits as their support. HDFC bank has hiked interest on deposits by 50bps while ICICI bank has increased by 50 to 100 bps more to new deposits and renewals.

In February HDFC bank had lowered its PLR by a quarter points. On the other hand the two public sector banks Canara Bank and Bank of India at present has decided not to hike home loan and auto loan rates even though they have increased interest rates for other categories of borrowers by 50 bps to 13.25%. On a floating rate basis, Bank of India is offering home loans in the group of 9.25-10% and Canara Bank is charging 10-10.75%.

Allahabad Bank and Dena Bank the state owned banks have also taken decision to raise PLRs by 50 bps to 13.5%. Canara Bank, Allahabad Bank and Dena Bank have increased their deposits by 25 to 75 basis points, whereas Bank of India is yet to decided on the same.

RBI links risk weight on home loans to loan-to-value ratio

Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.

In the near future co-operative banks will find much easier to extend home loans if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has coupled the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.

Therefore for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will be required to set aside only 50% of the capital which they were required to maintain earlier.

In case the loan amount exceeds Rs 30 lakh in absolute terms but is still less than 75% of the property value, the capital requirement will be 75% of standard requirement. But there is no relief in capital adequacy requirement, if the bank provides loans for more than 75% of the value of the property.

The amount of capital banks are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank.

Capital adequacy ratio is the ratio of a bank’s net worth to its risk-weighted credit exposure. The risk weight age, in turn, is the ratio which determines the credit risk in a particular loan asset.

However capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weight age for loans in certain segments. For instance, for home loans up to Rs 30 lakh, the risk weight age on the loan is 50%. Hence banks will be required to set aside only 50% of the capital they keep aside for loans with a 100% risk weight age.

RBI increases or reduces the risk weight age depending on its observation of risk in a particular segment. Banks are able to reduce loss with the higher risk weight age in the event of a default. Banks also discourage lending in such segments by making it more capital intensive.

The central bank has made norms easier for branch and ATM licensing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. There is one more condition for the co-operative banks that they need to have net NPAs of less than 10% and should have made a profit in the preceding year.

You can avail tax deduction on home loan under act 1961

Under the Income Tax Act 1961 individuals can claim a tax deduction on the principal and interest components of a home loan. These deductions are mentioned under Section 24(b) to assess who have taken a loan to either buy or build a house.

In case of following conditions interest on borrowed capital is deductible up to Rs 1.5 lakhs:

▪ Capital is borrowed on or after April 1, 1999 to acquire or construct a residential property.

▪ the acquisition/construction should be completed within three years from the end of the financial year in which capital was borrowed.

In fact the amount should have been borrowed before April 1, 1999 for the purchase, construction, or repairs of a house. If the loan was taken on or after April 1, 1999, the construction should be completed within three years from the end of the year in which the loan was taken. In addition, principal repayment of the loan borrowed is eligible for a deduction of up to Rs 1 lakh under Section 80C from the assessment year 2006-07.

The bank at the time of sanctioning the loan certifies that the interest is payable on the amount advanced for acquisition or construction of the house, or as refinance of the principle amount outstanding under an earlier loan. In case the conditions mentioned are not fulfilled, interest on borrowed capital is deductible up to Rs 30,000.

The maximum deduction permitted in a financial year for the original loan (if any) plus for any additional loans taken is Rs 1.5 lakhs. Therefore, if the deduction on an existing loan is less than Rs 1.5 lakhs, then you can claim for further benefits from an additional loan, subject to an upper limit of Rs 1.5 lakhs in a financial year.

Here one thing is to be taken note of is that you can claim the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act only on the payments which have been made. If a person fails to make EMI payments, he cannot claim tax benefits on them.

According to Income Tax Act, the person who has taken the loan is eligible for tax rebates. Interest on a fresh loan can be claimed as a deduction, subject to the upper limit. The interest on a loan, taken for repairs, renewals or reconstruction, also meets the criteria for the deduction of Rs 1.5 lakhs.

A husband and wife, both taxpayers but having independent income sources, can claim for tax deductions on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken in their names.

In case the claim found to be faulty i.e. a home loan is simply an arrangement between a loan-seeker and a builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed and benefits previously claimed will be clubbed to the income and taxed accordingly.

At times person buys a house and sells it within the same year or after three years, and earn a profit on the deal then a capital gains tax liability arises on it. For example, if a person purchases a house for Rs 45 lakhs with a loan and sells it in the same year for Rs 65 lakhs, he makes a profit of Rs 20 lakhs.

The short-term capital gains tax will be charged on the profit made by selling the house as the sale took place in the same year. But, if the sale had taken place after three years, then a long-term capital gains tax liability would have arisen.

According to Section 54 long-term capital gains will be exempt from tax if the amount (after factoring in the indexation benefits) is invested in capital gains tax saving bonds or in a house.

HDFC provides home loan solutions at your doorstep

In Thiruvananthapuram HDFC Bank launched ‘home loan solutions in 30 minutes at your doorstep’. The main aim behind the extensive campaign of this scheme is to maximizing customer convenience in the State by providing doorstep assistance on home loans.

According to sources of the bank a set up has been developed consisting of 12 offices and strong team of over 300 HDFC sales personnel, to cater the housing needs of the home-seekers spread over 300 locations in the State within the shortest possible time by connecting with them.

RBI policy brings relief for home loan borrowers

The Reserve Bank of India's in its credit policy has given no indications for a rate hike and home loan borrowers can thus expect the status quo to be maintained on the interest rate front. The apex bank in its annual statement on the monetary policy for 2008-09 has not made any key changes, including the bank rate unchanged at 6.0 per cent while the reverse repo and repo rate at 6.00 per cent and 7.75 per cent respectively.

However the central bank has, hiked Cash Reserve Ratio (CRR) affected by 25 basis point, whereby scheduled banks will now be required to maintain CRR of 8.25 per cent beginning May 24, 2008. This means a drain of Rs 9,000 crore from the banking system. The RBI policy has projected GDP growth for 2008-09 in the range of 8.0-8.5 per cent and endeavors to bring inflation to around 5.5 per cent in 2008-09 from the current level of 7 per cent.

Expressing his views on RBI credit policy RV Verma, Executive Director, National Housing Bank said it as a neutral and positive policy which recognizes the need for growth. He said the CRR hike will not have a direct impact on interest rates. He added that the RBI in its policy has recognized the importance of supply and any increase in interest rates will hurt supply and bring cost push inflation.

Here the cost push factor is major rather than demand pull this clearly shows that the policy is trying to certain that supply does not get restricted because of want of credit. Another important feature in the policy of the apex bank has increased the priority sector lending for home loans from Rs 20 lakh to Rs 30 lakh and the risk-weight reduced for home loans up to Rs 30 lakh. Thus in the both growth and inflations has been balanced while recognizing the role of supply management in determining growth.

On the other hand Canara Bank chairman MBN Rao said in the current scenario home loan rates are unlikely to increase and borrowers can look forward for finer pricing for loans up to Rs 30 lakh, with a condition, banks maintain the reduced risk-weight and lower requirements of capital adequacy for such loans. The move is being considered as good because it will encourage more loans in this segment which will specially help the middle class. Giving views on policy Canara Bank Chief Economist Manoranjan Sharma described policy as good and justifiably hawkish. He said main concern was to address inflationary tendencies. Credit growth has been at about 30 per cent in the last three years.

Commenting on the policy V K Khanna, MD PNB Housing Finance said it will be good for home loan borrowers, specially the middle class, which may be given favored treatment in case of loans up to Rs 30 lakh. There will be a moderate liquidity control through the CRR hike, which will not have much impact. "I don't personally see any increase in rates," he adds. The CRR hike will be counterbalanced by the reduced risk weights on loans below Rs 30 lakh, he says. According to Punjab National Bank GM Arun Kaul the policy does not indicate any change in interest rates. The RBI wants to maintain the money supply at 17%, as against the actual money supply at around 22%. The main aim is to continue growth momentum without doing any changes in interest rates.

It would be premature to say anything about interest rates on home loans. Banks will wait and watch and depending on the incremental cost of deposits and liquidity, decide on interest rates.

While real estate developers like Boman Irani, MD, Keystone Group, feel the RBI's CRR hike has sucked Rs 8000 crore from the market, which means the money market will be tight and the real estate sector will be impacted. Irani feels that it would be too early to say anything one has to wait and watch to see whether the banks will affect an increase in interest rates, which will mean more pressure on home loan borrowers. On the whole, experts believe, that RBI's Credit Policy has acknowledged the slow down in the housing sector and its impact on the economy as a whole. Therefore, the central bank has decided to support the sector.

RBI reduce risk weight on home loan will help in lower interest rate

The Reserve Bank of India (RBI) has reduced risk weight on home loans which will help banks in lowering interest rates on home loans below Rs 30 lakh.

RBI governor YV Reddy stated, “Reduction in risk weight-age is an enabling provision and we expect banks to pass on the benefits to the customers.” Now the risk weight on home loans up to Rs 30 lakh will be 50 basis points. Earlier risk weight on home loans up to Rs 20 lakh was 50 basis points and above Rs 20 lakh was 75 basis points.

However banks at the same time have no plans to raise interest rates on bigger home loans in spite of a hike in the cash reserve ratio. “Considering the slowdown in the economy and that interest rates have already peaked, banks may not consider raising lending rates immediately,” said Punjab National Bank’s CMD, KC Chakrabarty. While home loan rates vary from 9.5% to 12% on the floating rate loans.

Keki Mistry, vice-chairman & MD of HDFC — India’s largest home loan lender said, “This is a positive step as property prices have gone up significantly. This will encourage banks that are running tight on capital to extend more home loans.” He pointed out although these guidelines apply to banks, the National Housing Bank, which regulates housing finance companies like HDFC, usually follows RBI’s footsteps.

Currently, several public sector banks are offering lower interest rates on home loans below Rs 20 lakh. However, even as the risk weight has been lowered for loans up to Rs 30 lakh, only loans up to Rs 20 lakh will be eligible for priority sector loans. However RBI has allocated different levels of risk weight for different categories of loans to calculate capital adequacy ratio, which is pegged at 9%. On a loan of Rs 100, if the risk weight is 100%, a bank has to set aside a capital of Rs 9.

Earlier urban co-operative banks (UCBs) were offering home loans up to Rs 25 lakh now RBI has increased the limit to Rs 50 lakh for UCBs. “This will increase the home loan portfolio of UCBs and give them competitive advantage over its peers in the private and public sector. Currently, home loan portfolio accounts for 35% of the loan portfolio and UCB do not have high NPA in this segment,” New India Co-operative Bank’s CEO, DR Shirodkar. Although limit has been increased but it will be subject to certain conditions which are yet to be finalized.

Negotiate for cheaper home loan

Are you planning to take home loan for buying your dream house?

In each corner of the street banks are offering home loans but one should keep eyes open before making final decision.

Here are some simple steps to help you in finding cheaper home loan.

When you apply for the loan the bank check your income statement because the loan is sanctioned according to your repayment capability. There is another option in case your income alone cannot help in getting loan from the bank. You can put in more of your own money or adding a co-applicant to the loan i.e. you can apply for a loan jointly with your spouse or any close relative who is earning good income and can finance you.

Many banks offer an attractive interest rate but fleece you by charging high fees so you must ask for lowest possible initial fees and charges. But the final amount will depend on your income.

A bank imposes various charges like processing fees, pre-closure fees, etc. The processing fee is usually a percentage of the loan amount. So before finalizing the bank for loan, do the survey so that you can compare the charges being offered by your selected bank. Negotiate with the bank to either lower the percentage or even ask them to fix an amount about post-disbursement fees, and the terms and conditions.

Negotiate for loan amount according to your salary and repaying capacity. Usually the bank gives 80% of the amount of the value of the property. It is you have to see that your budget does not get curtailed with the remaining amount which you have to shell out from your pocket.

While selecting the bank for loan do survey about bank’s history and infrastructure. Most of the banks are offering post-disbursement service an essentially customer service which includes answering your queries on various aspects relating to your loan. The bank calls you. You don't need to chase them.

Follow these simple steps before you sign on the dotted line with your home loan provider.

Choosing the best option of home loan

Today the economic structure of the society has changed. The youngsters working with MNCs are earning good package. As the incomes have increased people are looking for different options for investments. Investing in a property either buying home or land is one of the best options being looked upon as loan for this is being offered by almost every bank.

Although every bank is offering multitude housing loan options, but one has to be very careful and choose the one that best suits your financial profile otherwise you might end up paying a heavy price. Here some steps which will help you in choosing the most suitable home loan scheme.

First is the Eligibility: Your income level decides the loan amount. The loan can be taken individually if your income level is up to the mark otherwise you can go for a joint loan with your spouse or some specified relatives who have a means of income.

The one thing to know is bank might sanction more amount of loan than you have applied for on the basis of your current income if you choose a loan with a longer term. Though the eligibility will generally be the same across all institutions, study the variations carefully.

The Time span: Before applying for the loan do your homework about the most attractive rates. Normally, banks offer home loans for a five, ten- or 15-year period. The interest rate depend is in relation to the time period of the loan repayment i.e. interest rate for a five-year loan may be one to two percentage points lower than ten-year or a fifteen-year loan. But you cannot to go for five year loan depending on this sole criterion.

You have to choose the time period very carefully if the period is too short; you might end up spending a more-than-comfortable portion of your income on repayment of principal and interest and be left with little for your living expenses. Apart from this you might face financial crisis incase unforeseen expenses crop up. In case you choose to repay over too long a term, you will be still paying the installments of home loan at a time when other financial obligations, such as your child’s higher education, may need to be met.

Fixed or floating rates which is best?

The most important question must be answered before taking loan. Fixed interest is always a bit higher than floating interest. But that is the premium you pay for maintaining the same repayment amount, month after month, year after year, irrespective of the interest rate fluctuations that may occur.

In today’s scenario where there has been a rapid change in the interest rate this would seem ideal. You must ask your banker if the fixed rate is really fixed or whether it will be reviewed, say, once every two or three years.

Although fluctuating rate loans are cheaper but they come marked with uncertainty. For, instance, if you had taken a housing loan three years ago when interest rates were benevolent, today your monthly installments might hit the roof unless you have extended the tenure to stick to the same amount.

But this might be temporary. In case the rates go below the fixed rate in another two years, you will be able to save something for yourself.

Knowing the long-term nature of the loan, a long-term view on interest rate movement should guide your choice.

Repayment Options

Pay attention to the repayment options available before choosing a scheme. Some banks offer a step-up facility under which you can pay a lower EMI (equated monthly installment) in the initial years and gradually increase your payments corresponding to growth in your income.

In this you also get an option to step up the EMI whenever you feel you can increase the repayment amount. Some banks also give loan to buy a property under construction, in this case some banks give option to decide on how much you want to pay back till the property is ready; the interest element being the minimum required to be paid.

This in turn helps you begin the repayments as soon as possible and finish the repayment within a schedule. Also, check with the banks whether they have option of pre-paying loan at any point if you have a lump sum on hand. Never forget to compare the charges for exercising any of these options across lending institutions.

Tax benefits on loans

Both principal as well as interest payments carry tax benefits.

Under section 80C, the tax benefit on principal amount up to a maximum of Rs 1 lakh along with other savings such as insurance premium and PPF, and on interest payments up to Rs 1.5 lakh (subject to various provisions in the Act) as a deduction from Income from house property.

Real estate experts expect raise in home loan ceiling for metros

Within months the inflation has gone very high, run-up of April monetary policy has been taken over by the discussion on repo rate as it is expected that there are possibilities of increase in either the repo rate (the rate at which the RBI lends to the banks) or Cash Reserve Ratio (the amount of funds that banks have to keep with the RBI) but it is for sure regarding the home loan rates that either they will remain where they are or go up further.

Deepak Parekh, Chairman, HDFC, in an interview with The Indian Express said, “it is most likely that there will be an upward revision either in the CRR or repo rate and so the home loan rates could go up marginally.”

Other than this there is one more factor which is causing greater concern, especially among real estate players and the others involved — the Rs 20 lakh limit for priority sector lending. According to them there’s need, to revise the upward limit from Rs 20 lakh or introduce a differential limit for Tier I, II and III cities so that home buyers in larger towns can also avail benefit. Another suggestion they gave is to increase the tax benefit limit of Rs 1.5 lakh for the interest component paid on a home loan.

Anuj Puri, Managing Director, Trammel Crow Meghraj, a multinational real estate consultancy, said: “There are properties within the Rs 20 lakh limit in smaller cities but home buyers in larger cities are getting little benefit from it. I think there should be differential limits based on the tier of the town — like Rs 45 lakh for Tier I, Rs 25 lakh for Tier II and Rs 15 lakh for Tier III cities. The tier classification can be based on the population of the town. Also the tax benefit limit of Rs 1.5 lakh on the interest component repaid should go up. This will bring down the post-tax interest cost for home buyers.”

The other big players of the industry also have the same view. Rajeev Talwar, Group Executive Director, and DLF, said: “Property prices have risen due to a supply gap created as a result of land not being released. There is need for Government to raise the limit for priority sector lending from Rs 20 lakh if they want the credit offtake to go up. Also the limit on tax benefit should be raised from Rs 1.5 lakh. The basic idea should be to allow the economy to flourish and there should be no artificial barrier.”

As per the rules presently, home loans up to Rs 20 lakh fall under priority sector lending across the country. But in recent years, there has been an incredible increase in the property prices across the cities. Then the prices also vary widely from city to city. At the same time the properties under Rs 20-25 lakh are available in Tier II and Tier III cities, therefore it’s difficult to find properties in this range in metros like Delhi and Mumbai.

According to an industry expert “almost 60 lakh individuals have taken home loans and almost 50-60 per cent of these transactions fall within the Rs 20 lakh bracket. Most of these small ticket loans are in smaller towns while in metros and larger towns; this percentage falls to 15-20 per cent.” This is primarily due to the high property prices in larger towns. Therefore the policy of keeping small-ticket home loan rate low is not benefiting borrowers, especially in the metros. Experts are of the view that it is time for RBI to revise the limit range and frame the policy in a way that meets requirements of home buyers across the country proportionately.

Nevertheless, banks have uniform slabs across the country. “Banks need to have categories because of the risk weight age assigned to the size of the home loan, as directed by RBI,” said Parekh. As per current guidelines, banks are required to assign a 50 per cent risk weight age to home loans of up to Rs 20 lakh. And if the loan amount crosses Rs 20 lakh, the risk weight age assigned by the bank rises to 150 per cent. In turn this raises the bank’s cost of lending to borrowers purchasing higher-priced properties.

It is also being expected due to dynamic changes in the market and increasing property prices in metros and bigger cities there is a need to revise the home loan slabs.

Two years before, even in a large city Rs 20 lakh used to be a respectable amount to buy a decent sized house. With the boom in property prices have risen steeply.

Asked about the need to revise priority sector slabs, a senior RBI official said: “We always keep reviewing policies as per evolving situations.” Earlier in April 2007, RBI had reduced the risk weight age for home loans of up to Rs 20 lakh from 75 per cent to 50 per cent.

Government plans to give an interest subsidy for urban poor

In India in the metro cities New Delhi and Mumbai the real estate prices have doubled in last two years and this has made difficult for the less affluent to have their own homes. In December the government had said that India can face a shortage of 26.5 million houses by 2012.

Junior Finance Minister Pawan Kumar Bansal said in a written reply in parliament in New Delhi that India is planning to give an interest- rate subsidy on mortgages for the poor in the nation’s cities as property prices soar. “A proposal to provide interest subsidy on housing loans for the economically weaker sections and the low-income group in urban areas is under consideration of the government of India”. He said the details of the plan are being “worked out”.

The government has been pushing banks to lower lending rates to encourage spending and keep growth from slowing. Even the Finance Minister Palaniappan Chidambaram earlier this month had suggested that banks can cut rates on home loans up to 2 million rupees ($50,000). Following the persuasion from the finance minister State Bank of India, the nation's biggest bank, and a few other state-run lenders last month lowered the rates they charge top-rated borrowers. The Mumbai-based State Bank of India had cut its rate to 12.25 percent in two phases last month.

The government also has plans to forgive 600 billion rupees of loans owed to banks by small and marginal farmers. Though all this a election stunt as the Congress party-led United Progressive Alliance government has to face elections before the tenure of the lower house ends in June next year.

Want to take home loan – Fixed or Floating?

Earlier the public sector banks had slashed rates then last week Punjab National Bank slashed its loan rates. Then the US Fed had also slashed rates. Currently we are on the higher side of the interest rate cycle in India and the interest rate differential between US and Indian rates has widened as RBI kept its rates steady in the last credit policy. It is expected that RBI might announce a cut in rates in the next credit policy in order to narrow the interest rate differential.

Establishing the weakness of the global economy, in the short term interest rates are likely to move down rather than up. Therefore new home loan borrowers should go in for flexible rates in order to take advantage of the likely downward movement in rates.

While floating rate loans are 1.5-2 per cent cheaper than fixed rate loans (of comparable tenure). Then why to pay Rs 100-150 more per lakh of loan, and fix yourself for your entire tenure (10-20 years) at today’s high rates?

In case the interest rates are at the bottom of the interest rate cycle then only it is advisable to take home loan at fixed rates. When the floating rate is around 7-7.25 per cent, then it is the right decision to take a fixed rate loan at 8.75 per cent, then you will be the winner. Though, it is difficult to predict the bottom of the interest rate cycle. However, if you look at the last interest rate cycle and compare current rates, your call should be good enough. But the rule to follow: take a floating rate loan when rates are on the higher side and a fixed rate loan when rates are near the bottom.

Indian small banks adopt the policy of wait and watch on cutting of lending rates

Most of the bigger banks have slashed their lending rates after the persuasion from FM and the Reserve Bank of India.

According to bank officials many of the small and medium Indian banks will like to wait and watch before revising lending rates, even as some of their bigger peers reduced rates in the last few days.

"The bigger ones have done it, but others have not done it yet," said Prakash P Mallya, chairman and managing director of the state-run Vijaya Bank. He added that it would take a view after some of the medium sized banks have revised their rates.

Though on Wednesday four state-run banks, including the country's biggest lender, State Bank of India (SBI), revised their prime lending rates.

SBI and Canara Bank have cut rates by 25 basis points each, while Bank of India and Union Bank of India slashed rates by 50 basis points each.

"We have not taken any decision as yet," said V. Santhana Raman, executive director, Bank of Baroda, saying more so some bigger banks such as Punjab National Bank is yet to decide on the revision of rates.

Chairman Ananthakrishna told, private lender Karnataka Bank plans to keep all rates unchanged for some more days.

He added "We will wait and watch," it could review the rates in the first half of next month.

"We will take a decision in a week's time, maybe after the budget," said M. Venugopalan, chairman and CEO, Federal Bank.

He also added that there is not much liquidity available; however he acknowledged the rates are high after factoring in the deposit costs.

Commenting on whether there can be a rate cut he said, "We can’t be out of the market, we will be in line with the market".

M.S. Sundara Rajan, chairman of Indian Bank said "Our rates (PLR) are already competitive and there is no question of reducing it."

Eligibility criteria for getting home loan

There are number of factors that count for the eligibility for a housing loan. Though RBI has drafted guidelines for the eligibility for the loan but the banks have their own criteria to determine the eligibility and quantum of housing loan. The borrower’s should be aware of the factors before applying for the loan.

1. Information on the application form. The information filled by the customer in the application form is verified from various primary and secondary sources - through interviews, calling up the employer, verifying from the database etc. In case of wrong information or discrepancy, the loan application is liable to be canceled.

2. The financial status of an individual is an important factor for determining the eligibility because the repayment capacity of the borrower depends on the financial position. The income level, net income, liabilities etc determine the amount of loan.

The requirements include a particular minimum income or a fixed and certain source of income. The credit history of the borrower has an important role in determining the loan eligibility. Usually, the lenders maintain a database of borrowers and verify the credit history to check for previous repayment defaults, even from other lenders.

3. The personal profile of the individual is also important. These include factors like educational qualification, profession, number of dependents, assets owned, liabilities owed, savings history etc. A higher number of Dependants or existing liabilities implies lower repayment capacity.

4. The individual's age give an idea about the earning life, and the life cycle stage at which the individual is. In case the property is co-owned, the co-owner cannot be a minor. Moreover there is a fixed age limit of the co-owner. The age limits are set to minimize ownership disputes. The age limit is taken into consideration while fixing the tenure of the home loan and EMIs.

The applicant's retirement age is also considered. For example, if the applicant is 45 years of age and is set to retire at 60 years, the maximum loan tenure available will be 15 years.

Also, in case the bank has a 75-year age limit for a co-applicant, if the applicant is 40 years old and the co-applicant is 60 years old, then the home loan will be sanctioned for a maximum period of 15 years only.

5. The reputation of the builder also counts. List of pre-approved builders is available with each bank. Their credentials are already verified by the bank and as such loans are easily available for their properties.

6. Location of property also matters for the eligibility. Banks have specific norms with respect to a minimum area of a flat too. This may be built-up area or carpet area.

7. The age of the property is also an important consideration in case of purchase of existing properties.

If the resale property is less than 50 years old then only home loans are sanctioned. Banks conduct legal and technical appraisal of the property to see whether the title of the property is clear, there are no ownership disputes, the property is free from any encumbrances etc.

In case there are any objections in these appraisals loan application is liable to be turned down.

Banks to unload more of bad home loans to Arcil

Banks in a view to clean up their loan books drop by drop they are unloading their bad home loans to the Asset Reconstruction Company India Ltd (Arcil), the aggregator of distressed industrial assets.

It is not a frightening surge yet, but there are signs of more bad mortgages being passed on to Arcil to an extent that it is expecting of buying as much as Rs 2,500 crore of bad home loans —- or a quarter of its total distressed assets book —- by the end of 2008.

S Khasnobis, managing director and CEO, Arcil, said the company recently bought some more of distressed home loan receivables.

"The total size of our retail home-loan paper would be about Rs 800 crore at present," he said. "This is through Rs 400 crore worth of receivables collected in each of the last two quarters."

He said the ratio of bad home loans in the Arcil portfolio is going to increase, and this business is expected to drive future growth for the company.

Earlier in its recent study, rating agency Crisil had accredited the rising trend of defaults in home loans to increasing competition in the banking sector to capture market share.

Non-performing home loans are currently quite high at around 3.3 per cent, Crisil said.

Khasnobis said defaults on home loans ensue last in an economic unwind, after defaults on credit cards and personal loans.

Crisil said domestic housing finance companies have told it that non-performing home loans have risen in India because of "willing defaulters" and an "emerging population of fraudsters" over the last two years.

"This is a reflection of the industry's aggressive marketing tactics and some inadequacies in appraisal standards and systems," the rating agency said.

Khasnobis said to be profitable in the bothered home loans segment, economies of scale are crucial.

"We are setting up a dedicated team to manage home loan paper. Some people have already been recruited," he said.

Cibil and Banks plans database to curb home loan frauds

To keep a check on the home loan frauds banks along with the Credit Information Bureau (India) or Cibil have plans to create a database of mortgaged properties.

Cibil, which collects borrower details from banks, has approached the Indian Banks Association (IBA) with a proposal to develop a repository for mortgages. Banks have shown interest in creating a mortgage database as cases of borrowers having availed of multiple loans against the same property have come to light.

With the creation of mortgage database banks would be able to determine whether a property has been already mortgaged when a borrower comes to them for a loan against it and this would help in checking the increasing instances of housing loan frauds.

Banks will be giving details of the mortgaged property to help Cibil create the repository, besides sharing the borrower profile. Details such as the location and address of properties will be collected.

A senior IBA official said besides this from a credit report on the borrower, banks will be able to match the property to see whether it had been mortgaged already.

At present, a bank can only check the ownership details of a property, but it is not possible for them to determine if a loan has already been taken against it. It is possible to take color photocopies which are very similar to the original.

Even in the case of under-construction properties frauds have been detected. These properties have been unoccupied when a bank visited these for inspection, the official said.

Cibil is the only operational credit bureau in the country with 143 members, which includes 77 banks. In 2004 the number of checks done by members has gone up to 90 million per annum from 4 million annually.

Arun Thukral, managing director, Cibil, said: "There are registered mortgages and equitable mortgages. The repository would hold information on all mortgages. We are talking to banks. It is too early to say what shape or when the product will be launched."

Self-help groups can take loans to build a house

National Housing Bank (NHB) has tied up with Chennai-based Repco Foundation for Micro Credit to distribute micro-housing loans. This will enable the Self-help groups (SHGs) to take loans for constructing a home. Before, SHGs used to take loans for starting enterprises. National Housing Bank (NHB) along with Repco Foundation for Micro Credit will give out loans on a pilot basis in five districts in Tamil Nadu.

Repco Foundation for Micro Credit, has been promoted by State-owned Repco Bank, is a Section 25 entity and has so far distributed loans worth Rs 50 crore among 5,000 SHGs.

In India, there is a provision for non-profit / public charitable organizations which can be registered as trusts, societies or a private limited non-profit company, under Section-25 companies.

"Our experience with SHGs shows that at least 90% of them want assistance for housing. We plan to disburse at least Rs 10 crore of credit for housing this year," said Mr M Balasubramanian, managing director, Repco Bank. In the initial stage the loans will be distributed in five districts in Tamil Nadu – Nilgiris, Coimbatore, Trichy, Madurai and Karur.

The ticket-size of the housing loan will range from Rs 25,000 to Rs 2 lakh, at an interest rate of 11.5%. "This loan is for people who already own the land and will be mostly used for renovation and additional construction, which usually takes around Rs 50,000," Mr Balasubramanian said. Also, as per the agreement, NHB will provide 100% refinancing for the loans disbursed.


A study was conducted on housing microfinance by IFMR's Center for Micro Finance according to the result of the study the main challenges faced by the housing microfinance in India are funding sources and security linkages, in terms of complicated land titles and security issues. Also, as housing is a consumption loan with no returns, unlike a business venture, micro finance institutions are reluctant to meet the housing demands

Industry analysts say that housing microfinance is still at a growing stage in India, with only a small group of micro finance institutions having disbursed this form of credit.

"This is mainly because the lending methodology is completely different and the repayment period is much longer than the normal loan period," said Ms Minakshi Ramji, research associate, Centre for Micro Finance- Institute for Financial and Management Research (IFMR)

In case of Repco's, the loans will be disbursed only to borrowers who have been associated with them at least for two years and each SHG will give the credit to the individual. "There is a credit guarantee provided by the group. The repayment period in such a loan is 84 months, compared to a normal loan which is 12 to 24 months," Mr Balasubramanian said. No collateral will be required for the loans up to Rs 50,000.


According to a report by NHB, in spite of refinance support to primary lending institutions, in rural areas the housing credit has remained dormant at 10% of the total bank credit during the last few years. Approximate calculations indicate that even by 2020, only 60% of India's population will be in the rural areas, in spite of increasing trends towards urbanization.

Banks seek clarity from RBI on reverse mortgage loans

Banks intend to request for clarity from the Reserve Bank of India (RBI) on the risk weights that should apply for reverse mortgage loans.

Currently the risk weight for real estate sector applies to reverse mortgage loans, which is calculated at 150 per cent of the value of the loan. A section of the bankers think that the risk weights are high.

Bankers are of view that the risk weights for small size loans should be on equivalence with that applicable on priority sector loans, which is 75 per cent of the value of the loan. Housing loans up to Rs 20 lakh are classified under the priority sector.

“We asked for a clarification from the RBI on what should be the risk weights on reverse mortgage loans,” said a senior official of Bank of Baroda at a seminar on reverse mortgage organized by National Housing Bank and Tina Ambani’s Harmony for Silvers Foundation.

Reverse mortgage provides senior citizens insufficient income sources to mortgage their own homes for a monthly stream of income for up to 15 years.

In case senior citizen is alive, then he or the heir, at the end of the reverse mortgage period, will have the option of retaining the house after paying the principal plus interest to the lender or the lender will be able to sell the house and pay the owner the difference between the amount due and the sale price.

Finance Minister P Chidamabaram, in his 2007-08 Budget, had stated that NHB will introduce a ‘reverse mortgage scheme’ for senior citizens.

After NHB gave the guidelines on the reverse mortgage, several banks besides Deewan Housing Finance launched the scheme for senior citizens. The banks, which have launched the scheme, are Punjab National Bank, State Bank of India, Bank of Baroda, Allahabad Bank, Indian Bank and Axis Bank.

National Housing Bank (NHB) Chairman S Shridhar said that the reverse mortgage scheme although well structured has taxation, valuation and legal issues.

The housing regulator has written to the Central Board of Direct Taxes to exempt the income which is a loan to the senior citizen, from Income-Tax.

“There has to be some amendments to the I-T laws. Besides, the issues of how can the banks get their money back if the senior citizen passed away needs to be addressed. The government of New Zealand is drafting a law to ensure unhindered access to repossession of the house after the senior citizen passes away,” said Shridhar.

Budget to unveil credit-cum-interest subsidy scheme for EWS

The elections are due in 2009 and the government has started preparing platform for the elections. The current budget is likely to unveil a credit-cum-interest subsidy scheme for the economically weaker section (EWS). The poor might get a 5% interest subsidy on home loans which might leave the exchequer poorer by around Rs 1,600 crore annually. So it can be said that 2009 elections might help the aam admi’s dream of owning a house come true.


“The discount offered by banks and financiers would be met through interest subsidies provided by the government,” a housing ministry official said.

In November with RBI the National Housing & Habitat Policy announced schemes; the ministry is working on the protocols of the schemes.



“The Budget may define the salary brackets eligible for the interest subsidy,” the official added.



Kumari Selja housing and urban poverty alleviation minister feels that the boom in the real estate is targeting only the upwardly section of society.

“The objective of the interest subsidy scheme is to ensure the economically weaker section gets the opportunity to own houses,” the official added.

During the 11th Plan period shortage of dwelling units was anticipated at 45 million.

Out of which the weaker section needs more than 31 million. In the next five years the government is planning to address at least 50% of the requirement.


The credit-cum-subsidy scheme is expected to fix a loan ceiling of Rs 80,000 for EWS and Rs 1.50 lakh for the low income group (LIG). EWS comprises up to Rs 3,300 per month of those earning and LIG Rs 3,301-7,300 per month.

During this fiscal period the credit flow from banks and specialized housing finance companies (HFCs) for promotion of rural housing has not been encouraging. In 2007-08 banks and HFCs are expected to offer loans for 3.5 lakh dwelling units.


According to industry watchers the withdrawal of 0.5% concession on interest rate on refinance from the National Housing Bank (NHB) is the reason for low credit flow.

“We have requested the NHB to reintroduce the concession so that HFCs get some kind of incentive to offer more housing loans to the weaker sections,” DHFL Vysya Housing Finance managing director R Nambirajan told ET.