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Tuesday, Aug 12, 2008
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Tamil Nadu

Tamil Nadu

The rising credit burden

Aloysius Xavier Lopez

Inflation has taken its toll on retail credit, particularly the housing sector

Housing credit, the best growing retail credit segment of commercial banks, has been affected by the rising inflation. The recent monetary intervention of the Reserve Bank of India by raising the CRR and Repo Rate to 9 per cent has caused concern among all stakeholders.

The cost of funds has increased for the banks. This forces them to increase interest rates.

“It is too early to predict the effect of the recent RBI intervention as it may take time for it to reach individual customers. The lower middle class could be affected but not high-end customers such as NRIs as their earnings are going up,” says a State Bank of India official. “The changes in the housing market could be used to design products to suit the lower middle class as the profitability of banks mainly depends on this segment,” he adds.

Property prices have stagnated. The increase in the interest rate from around 7 per cent during the housing boom to around 12 per cent now has seen the EMI per lakh for a 20-year loan go up from Rs. 775 to Rs. 1,100. Those affected include the salaried middle class, those looking at houses as investment, and the slowdown-affected IT sector. Ironically, the IT sector drove this segment earlier. New entrants used to apply for loans within six months of taking up a job. “The number of ‘home loan segment files’ we do for a bank per month has come down from 300 last year to 170 now,” says V. Sadasivam, a leading property valuer.

However, as the penetration of the retail credit market, particularly the housing credit segment, is still low, there is enormous prospect for growth despite temporary setbacks,” says a Union Bank of India official.

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