Rising interest rates crash hopes of loan seekers
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The escalation of interest rates would force people who had floating rate of interest to pay more EMI now, writes Alosiyus Xavier Lopez
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Photo: N. Sridharan
On the wane: The number of takers for home loans has come down now.
The housing loan segment in Chennai has been a high growth area for banks for the past few years. Not any more after the interest rates began to climb. “As investment mode and speculation tapered more, the number of takers for home loan in Chennai has come down,” says a bank executive. “This is definitely a slowdown and the number of loans has come down,” the official added.
The housing loan is against security and the rate of growth of Retail Assets is not disturbing yet, an executive with a bank said. The customers who now seek housing loans are mostly IT employees, NRIs, and self-employed individuals, says an executive with the HDFC.
“The middle income groups perception to bank loan is slowly turning pessimistic and everybody is anticipating a correction in property rates in Chennai,” says K.R. Rajagopalan, Proprietor of Rohit builders. “To add to our woes, land values have increased but the builders are finding it hard to sell,” says Mr. Rajagopalan.
Although the loan quantum is based on the salary of the individual normally the component of rent of the house is also taken into account in calculating the loan repayment capacity of the individual. The age of the customer is invariably factored in while giving loan.
Basel II norms demands risk weighted assets of 125 per cent. For every Rs.100 we lend we have to have Rs.125 worth risk weighted assets. Hence the amount we lend is much less as free money is not so much with us,” says a senior official of a public sector bank. “The government increased the ceiling recently for the priority lending as a result, the ticket size or loan amount has grown in size. The bare minimum for a housing loan is 10 lakhs in our bank. The upper limit is 1.5 crore. The normal housing loan ticket size is around Rs.25 lakhs in Chennai. The housing loans below Rs.30 lakhs carry a lesser interest rate. However in the recent months the number of loans has not grown” said an official of a public sector bank.
Floating rate
Many customers select floating rate of interest now, said an official with the Union Bank of India. Probably the long tenure of loans influences this decision. But the escalation of interest rates would force people who had floating rate of interest to pay more EMI now. Not that the fixed interest rate is stable for the entire tenure. The bank has the right to change the fixed interest rate every two years. Even customers, who had opted for fixed interest rate, may end up paying more if the bank decides to increase the fixed interest rates.
“The prime lending rate of a public sector bank is now 12.75 per cent. The floor rate is 10.5 per cent. This measure followed the recent monetary intervention of the RBI. This increase in interest rate plays a role in preventing the common man from seeking a housing loan. An increase of 1.5 to 2 per cent in the interest rate may increase the EMI to around 150 to 200 per lakh. This may eat into the income of the family. If the Net Monthly Income (NMI) of a person is Rs.1,00,000 then the Equated Monthly Instalment (EMI) for the loan will not be higher than Rs.55,000. We ensure that EMI/NMI ratio does not exceed 55 per cent. ” “Since norms demand risk weighted assets of 125 per cent. For every Rs.100 we lend we must have Rs.125 worth risk-weighted assets. Hence the amount we lend is much less,” says a senior official of a public sector bank. “We also ensure that loan quantum is carefully worked out based on salary of the individual. In addition the component of rent of the house is also taken into account in calculating the loan repayment capacity of the individual. The age of the customer is invariably factored in while giving loan. We try to ensure they are not defaulters when it comes to home loans” he added. Though the banks are reluctant to share the information, it is not difficult to understand that the increase in interest rates seems to have affected this ratio and this has affected the lending levels as well. Has the change in interest rates led to more defaulters? Not many banks are willing to let us know the status.
At the most you hear that “default was very low in Chennai because the real estate value had appreciated much in the city. Now the purchasing capacity of people is affected by the high construction cost on account of increase in steel and cement prices.
However if current trends turn worse then the possibility of a housing crisis cannot be ruled out in the long run”, some confide.
Delay in delivery
Another issue that has cropped up in the recent months has been the delay in the delivery of flats. The big projects coming up in larger area are having a longer gestation period.
Bank officials say that normally only 24 months is allowed for the gestation period and the customer has to start repaying the loan amount since then. In the recent past some of the large projects are delaying the handing over of apartments and as a result, the individual borrowers suffer, as they have to start repaying the loan even before the apartments are complete.
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