THOUGH the housing finance industry in India took off about 20 years ago, the country’s mortgage penetration is still abysmally low. Mortgages as a percentage of GDP add up to a mere 9pc in India, against 18pc in China, 32pc in Malaysia, 45pc in Hong Kong, 62pc in the US and 81pc in the UK.

About 30 years ago, only the very rich could afford to buy a home in major Indian cities as there were no lenders giving home loans to the middle or low-income families. Today, there are nearly a score of leading housing finance companies (HFCs), banks and non-bank finance companies (NBFCs) that offer mortgages, but unfortunately realty prices in cities such as Mumbai, Delhi and Bengaluru have reached dizzying heights, making them unaffordable for the middle-classes.

Western countries with a high level of mortgage penetration have faced problems at times of recession. The 2008 global financial crisis was triggered by aggressive marketing of mortgages, leading to the sub-prime crisis. In Greece, 15 years of reckless borrowing by consumers, who were aggressively offered loans by banks after the nation joined the euro bandwagon has partly led to the current crisis.

But in India, the mortgage industry is conservative and the Reserve Bank of India (RBI), the central bank, and the National Housing Bank (NHB), the industry regulator, keep a tight watch over the sector. Delinquent loans in the housing finance business are less than 1pc of the total portfolio.

HFCs, however, are unhappy with the lending restrictions imposed on them by the government and the regulators. Deepak Parekh, chairman, Housing Development Finance Corporation (HDFC), the oldest and largest mortgage player, feels the regulators should ease the conditions, allowing the industry (including banks) to lend money to developers to fund their land purchases.

About 10 years ago, HFCs and banks could extend loans to developers, who would then buy land with the money. But in 2006, the regulators imposed a ban on lending funds for land transactions. “Such actions may be justifiable when there are fears of asset price bubbles,” Parekh said last week. “Over two years ago, the regulators reduced risk weights on exposures to commercial real estate and residential housing. This signaled that there were no fears of any speculative bubble. Then logically, the regulators now need to relax this near decade-old restriction.”

The respected businessman, who has also been on top advisory councils of prime ministers and finance ministers, believes extending loans to builders for acquiring land would bring down property prices. It will increase the stock of affordable housing and meet the aspirations of millions of Indians to become homeowners, he adds.

Prime Minister Narendra Modi on June 25 launched three ambitious urban development projects relating to housing for all, setting up of 100 ‘smart’ cities and a ‘mission for rejuvenation of urban transformation’.

The government will be injecting a massive Rs4trn into these three big ticket projects. A big question, however, remains as to how effective these programmes are; past experience indicates that much of the money goes down the drain, or a substantial part is siphoned off by a clique comprising unscrupulous politicians and bureaucrats and local mafia across the country.

WHILE caution is the buzzword when it comes to extending home loans, the same is not true in the case of loans against property (LAP). NBFCs and HFCs, who account for nearly half of the LAPs, are aggressively wooing consumers by extending loans against their properties.

“Non-banks have been at the forefront of the surge in LAP, riding on their strengths of innovation, ability to offer products based on customised cash flow assessment, and faster turnaround times,” says Pawan Agrawal, chief analytical officer, Crisil Ratings, which is part of Standard & Poor’s, the global analytical company.

Last week, the agency issued a warning about the rapid increase in loans in the LAP segment. “With competition intensifying, business dynamics are changing. Crisil is seeing incipientsigns of a build-up in risks,” warned Agrawal. NBFCs are increasingly offering big-ticket loans (valued at over Rs20m) and loan-to-value (LTV) ratios have risen to 65pc, even touching 75pc in some cases on incremental loans, he adds.

The agency expects the LAP business to grow at 22pc annually over the next four years, doubling to Rs5trn by March 2019.

In contrast, non-food credit growth of scheduled commercial banks slowed to 9pc in May, compared with an increase of 13pc in the same month last year, according to the RBI, which collects data from 46 select lenders accounting for about 95pc of total non-food credit.

And because of intensifying competition, LAP risks are gradually building up. About a third of the LAP portfolio comprises loans with either high LTV or big ticket size. And loans with commercial property as collateral are surging and now account for a third of all incremental loans.

Worryingly, delinquencies are also on the rise. Delinquent loans (90-plus days-past-due, on a two-year lagged basis) rose to 3pc in March, from 1.9pc two years ago. Crisil estimates the ratio will rise further to 3.3pc by March 2016.

The NHB has stipulated that the LAP portfolio of NBFCs who seek refinance from the regulator cannot exceed 25pc of the loan book. But LAPs are proving to be attractive for NBFCs as the interest rates are much higher (nearly 5pc more than mortgages) and profits are also high. Some of the NBFCs have, therefore, stopped borrowing from the NHB because of the 25pc ceiling on LAP.

Most of the borrowers of LAP are small-time business people and traders, who are used to paying higher interest rates to private lenders and micro-finance institutions. And with property prices continuing to rise in many cities, they find their loan size increase automatically. The only worry is when property prices tumble — as has happened in a few cities — and the NBFCs start demanding higher repayment amounts.

Published in Dawn, Economic & Business, July 6th, 2015

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