WHILE most other segments of the banking industry in India have witnessed a slowdown in recent months, the mortgage business continues to grow at a healthy pace despite high interest rates.

Housing Development and Finance Corporation Ltd (HDFC), the leader in housing finance, reported a 16 per cent growth in home loan disbursals in fiscal 2013. “There has been a robust demand from customers to buy a house for end use,” remarks Renu Sud Karnad, managing director, HDFC.

“The demand is largely coming from Tier II and Tier III towns and the periphery of major metros as properties are still quite affordable in these areas.”

The remarkable thing about the mortgage business in India is that it continues to grow despite two factors that should have a dampening effect – rising interest rates and soaring property prices. Real estate prices in cities such as Mumbai, Delhi (and the National Capital Region) and Bangalore – the three most important and valuable property markets in the country – have become prohibitive and beyond the reach of middle-class buyers.

In Mumbai, for instance, it is virtually impossible to get a modest flat for even Rs10 million in the suburbs; for young working executives, earning salaries of between Rs250,000 and Rs600,000 annually, this means paying several times multiples of their annual income to get a small apartment.

It is the same story in other major cities including Bangalore, Delhi, Gurgaon, Noida, Hyderabad, Pune and Chennai. But despite the huge difference in earning capacities and cost of apartments, demand for mid- and high-end segment in the housing industry has not slackened.

But as Karnad points out, demand for housing loans has soared in smaller cities and towns, boosting the fortunes of the industry.

Housing loans have in fact become the safest bet for housing finance companies, banks and other lenders. Delinquencies are minimal and with property prices rising all the time, their loans are fully secured.

The off-take of auto loans, consumer loans and other personal loans has been affected by the economic slowdown of the past two years, but the housing finance industry continues to expand at a brisk pace.

Home lenders are also expanding their customer base; while in the past, they were content at servicing the salaried class, increasingly they are now funding the self-employed, owners of small and medium enterprises and even customers from the informal sector, such as small shop owners.

For instance, Sundaram BNP Paris Home Finance, a relatively new player, claims that a third of its borrowers are self-employed professionals (as against just a tenth for most leading lenders). Other banks – both public and private – and non-banking finance companies (NBFCs) are also extending home loans to the non-salaried class.

Karnad of HDFC points out that better tax compliance and credit bureau information (which monitors the credit worthiness of individual borrowers) helps lenders to pick up disciplined borrowers and genuine customers from the non-salaried class and extend loans to them.

THE exposure of leading mortgage players to the self-employed and professional segment will also go up, as comfort levels are increasing. Last month, the Reserve Bank of India (RBI), the country’s central bank, cleared the setting up of the India Mortgage Guarantee Corporation (IMGC), the first mortgage guarantee company to be registered with the central bank.

The National Housing Bank (NHB), the regulator for the housing finance sector, is the majority stakeholder with a 38 per cent stake in IMGC. US-based Genworth Financial, with a 36 per cent stake, is the technical partner in the venture, while the Asian Development Bank and the International Finance Corporation have a stake of 13 per cent each.

The setting up of IMGC will benefit the mortgage industry as lenders — who take cover from the corporation — as they are confident that their loans will not turn delinquent. Housing finance companies, banks and NBFCs can take guarantee covers and be rest assured that even in case of a default they will be compensated.

The guarantees are invoked in case of default by the borrower.

The setting up of the IMGC will help expand the mortgage business, bringing greater depth to the sector. Lenders will be encouraged to extend loans to the non-salaried class as well. The borrowers will have to share part of the burden of the guarantee fees, but considering the huge amount of loans, this would be negligible.

But with mortgage lending becoming a low-risk business, interest rates are also expected to soften over the coming weeks. According to R.V. Verma, chairman and managing director, NHB, the setting up of the IMGC will ensure that home loans are available to a wider segment of the population, boosting the housing industry.

Interest rates are expected to come down, with the RBI finally realising the time has come to lower rates. Last week, the Indian government released figures indicating that wholesale price inflation had fallen below the five per cent mark, the first time in three-and-a-half years. The wholesale price index was down to 4.89 per cent in April from 5.96 per cent a month ago.

Food inflation was also down at 6.08 per cent from 8.73 per cent in March. And core inflation also decelerated to 2.7 per cent in April, well below the three per cent comfort level of the RBI. The all-important consumer price index ended below 10 per cent (9.39 per cent) in April.

Citing the threat from high inflation, the RBI persisted stubbornly with the policy of maintaining high interest rates, leading to a sharp economic slowdown, as industry was starved of funds. The central maintains a hawkish tone, maintaining there is little room for monetary easing.

HOME loan rates are expected to become cheaper over the coming months, with the RBI likely to cut lending rates. In its recent credit policy, the RBI cut the repo rate (at which it lends short-term funds to banks) by 25 basis points to 7.25 per cent.

It also hinted at lowering rates for loans to the residential component of the commercial real estate (CRE) sector, as they are less risky. The RBI has treated all lending to the CRE as ‘sensitive’ and cautioned banks about their exposure to the sector.

Lending to the CRE attracts higher risk weights and higher provisioning requirements.

“It has been generally observed that the residential housing complex sector under CRE poses lower risk than the other components of CRE sector,” said the RBI recently.It now plans to carve out a sub-sector of ‘CRE-Residential Housing’ within the CRE sector with appropriate regulatory norms.

The tight monetary policy of the RBI, with regard to lending to the commercial real estate sector, has led to many developers coming out with innovative schemes. Some builders, for instance, urge apartment buyers to seek loans for funding their acquisition. The loans are available to individuals at an average cost of about 10 per cent, whereas builders have to pay upwards of 15 per cent to banks for commercial loans.

The developers offer to repay the mortgages on behalf of their clients till the time of giving possession (which could extend up to two years), if they agree to deposit about a third of the cost of the apartment. If the buyers agree, this turns out to be a win: win exercise for both sides.