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By C. R. L. Narasimhan
The Deputy Governor of the Reserve Bank of India, Vepa Kamesam, has cautioned banks against possible recklessness in lending to home buyers. Home loans have arguably been the fastest growing business segment in the Indian financial sector recently. The implication is that the explosive growth of home loans business could not have come about without a price. Almost 80 per cent of the retail loans, a thrust area, have been accounted for by housing loans. Following persistent reports that all was not well as some of the banks and housing loan companies would like the regulators to believe, the latest exhortation coming from a highly placed official of the RBI is timely. But will a mere cautionary advice do? Equally relevantly what should the sizable number of home loan seekers expect, if the banks (and home loan companies) suddenly scale down their exposures to this sector whose growth has been a principal factor underpinning the "feel good'' factor among the middle-class? The RBI's recent warnings, though technical in nature and addressed specifically to the loan providers are significant in many ways. First and foremost, it reminds the banks that no business can be done ignoring the inherent risks. The environment is highly competitive. Interest rates have touched rock bottom levels. Banks and housing companies have vied with one another in providing home loans at historically low costs and with various add-ons (life insurance, accident coverage and the like). The choice of fixed or floating rates on loans with relatively long tenures going up to 20 years or more has no doubt helped consumers but it is not clear that the banks on their part have taken note of the risks to their balance sheets. More basically, the business of home loans automatically carries a risk of " a mismatch risk for banks — between their assets (the loans disbursed) and their liabilities (deposits, capital and other owned funds). No commercial bank accepts deposits for tenure longer than three years. No housing long can be compressed within that short tenure. It is for this reason that in the initial years most banks emulated the housing finance companies in incorporating a separate outfit to do that business. But for a variety of reasons including a lack of expertise, the banks merged home loans with their main activities. So bullish have the banks been that there is now more than a hint of expanding their business "by cutting corners,'' if one goes by the RBI's caution. That has been a general complaint in other areas of financial activities too where the initial boom became a bubble with more and more players joining the hype. The periodic boom and bust in the stock markets in which banks often stood accused of inflating the bubble is one familiar example but there could be several others. Not long ago treasury management, now a fashionable means for boosting profits, was (to say the least for most PSBs) unorthodox if not questionable. Are the banks less than prudent in dispensing home loans? The RBI has reminded them that the sale deeds, which are taken as security, are not fool proof as is generally believed. Sale deeds do not create mortgages and besides cannot be "securitised'' meaning banks cannot sell their housing loans portfolio in the capital market (after converting them into securities). Powers of attorney have sometimes been confused with title deeds. An even bigger risk arises in the banks' reading of interest rate movements, now at an all time low. Passing on the interest rate benefit to their home loan consumers is an infinitely more complex process involving among others a correct estimate of the bad loans. Banks might have already been over optimistic: the level of bad housing loans is said to be much higher than what was estimated. Providing for them would naturally eat into their wafer-thin margins. The learning experience of banks should not prove too costly for their home loan consumers, both present and prospective.
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