Housing loans pose difficult questions
There was a time when deciding on taking a housing loan was rather easy. It is no longer so. In fact, whether to take a loan or not is a million-dollar question now.
Basically, who wants to be a borrower? Not many wanted to in the good old days. In the post-liberalisation era, all public sector banks and financial institutions came forward to finance buying of refrigerators, washing machines, televisions, music sy
stems, furniture, motor cars and finally, the dream house.
Housing was considered unproductive and loans were hard to come by before it was included in the priority sector. The priority tag prompted lenders to come out with schemes to make even the middle class and the poor own houses. The banks found this segment a safe area to park surplus liquidity. In due course, the long-term loan was born, of 10 to 20 years, though no one can fathom the value of money after such long periods.
The long-term asset-liability matching concept dawned on the wise banker. Imponderables such as the interest rate and the cost of deposits were cracked for acceptable solutions.
All these brought in new concepts such as fixed rates, flexi loans and so on. Many applicants cannot understand the terms used in the borrowing agreements, yet signed them on trust and on the basis of the “let us cross the bridge when we come to it” theory.
The dilemma
While we look for easy loans, we are confronted with “not-so-easy” issues. For example, the effects of the repo and reverse repo rates and the increase in the cash reserve ratio (CRR) after inflation touched double digits.
There are hidden dangers in home loans today. One is the revision of the rate of interest. The fixed rate is not so fixed and there can be an increase in interest behind your back. Further, reset clauses take you off guard.
Many a time, the flexi rate is in favour of the lender and not the borrower. The equated monthly instalments (EMIs) will go up when the interest rate goes up; sometimes, the period of the loan gets extended.
The effects of increase in the repo rate and the CRR have been manifold. First, the banks have revised the rates upwards. Every day, we learn about one bank or the other revising its Prime Lending Rate (PLR), followed by a raise in the lending rates. Some banks have raised the deposit rates as well. Second, the burden of repayment has gone up consequent on the interest rate increase. What prompts banks to undertake this exercise?
Banks sanction loans from the surplus they have after maintaining the statutory reserves. The cost of these funds decides the lending rate. A senior officer heading the asset-liability management department of a local bank says the cost of their surplus funds is around 11 per cent. Retaining a spread of 3 per cent, the PLR has to be 14 per cent.
Increase in the interest rate by 1 percentage point for a loan of Rs. 1 lakh for a period of 20 years will mean an addition of approximately Rs. 70 a month and for 10 years, Rs. 60. Based on this, the EMI will go up from Rs. 1,084 to Rs. 1,154 for 20 years and from Rs. 1,420 to Rs. 1480 for 10 years.
The risk weight of the portfolio decides the further load. The housing loan is a long-term commitment and no one can predict the interest rate movements with some exactitude beyond three or four years. The banks, therefore, like to have a constant review of the rates. In the case of home loans, many banks like to extend the floating rate rather than the fixed rate. Some banks have issued instructions to this effect. Even if the fixed rate is extended, a reset clause is included. Here again, no reset is normally allowed during the first two or three years.
Uncertain future
In a situation where the fear is that inflation will increase to around 15 per cent in a couple of years, the cost of funds will also go up consequent on the various measures enforced by the RBI. In such a scenario, the banks discourage fixed rates and offer flexi rates. Why is the bank compelled to revise the rate?
The cost of funds and the deposit rates are the key factors. Profitability of the bank’s operations, the spread, and asset-liability management are the critical areas.
Where does the home-loan seeker stand? One has to understand the terms and conditions and even the fineprint in the agreement.
The glossy ads and attractive offers are to be evaluated properly. Hidden charges and the reset clauses are to be understood.
K. SUKUMARAN
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