Mumbai: Consumers servicing equated monthly instalments (EMIs) on floating rate home loans have started facing the heat because of a rapid rise in bank loan rates.
Wooed by banks with concessional loan rates in the last couple of years, many mortgage borrowers are feeling the pain. State Bank of India (SBI), the nation’s largest lender, raised its minimum lending rate or base rate by 125 basis points (bps) since January while the Reserve Bank of India has hiked its policy rate by 100 bps. One basis point is one-hundredth of a percentage point.
Analysts are expecting another 50-75 bps rate hike this calendar year and this will make bank loan more expensive.
A 1% increase in rate translates into Rs 74 increase in housing loan EMI for every Rs 1 lakh loan for 15 years, according to an SBI official who spoke on condition of anonymity. The average home loan size is about Rs 19 lakh. This means, a 2% increase would lead to a Rs 2,812 rise in EMIs.
However, the actual hit could be even more severe.
Most home loan consumers took loans at special fixed rates for the first three years starting in 2009. Borrowers had to pay 8% in the first year and 9% for the next two years, and after this, the rate is to be adjusted to market rates, at base rate plus 1% or more for loans under Rs 30 lakh.
With the latest round of hike, SBI’s base rate is 9.25%, and if indeed RBI raises its policy rate by 75 bps, it can go up to 10% by the year end. This means, the home loan rate can be 11%. A 300 bps hike would lead to a Rs 4,218 rise in EMIs for a Rs 19 lakh loan.
Like SBI, ICICI Bank Ltd, the largest private bank in India, has also hiked its base rate to 9.25% now from 8.25% at the end of December.
“Even at the bottom of the delta, the increase has been 1.5-2%. EMIs have been going up and will go up further,” said Sonal Verma, India economist at Nomura Financial Advisory and Securities (India) Pvt. Ltd.
Rising EMIs are not only hurting existing borrowers but also driving away potential consumers from builders.
New home sales, particularly in metros such as Mumbai, have fallen 25-50% but price correction has not been more than 5-10%. While analysts say rising interest rate scenario is responsible for deferring home purchases, others blame the elevated property prices.
“Customers’ decision to buy homes is largely influenced by the property prices and its affordability and to a marginal extent on the rates of interest on home loans,” said V. Srinivasa Rangan, executive director of India’s largest mortgage lender Housing Development Finance Corp. Ltd (HDFC). “Considering the tax benefits available to borrowers on the interest and principal payments the net interest cost to borrowers is still attractive.”
According to Rangan, rising interest rates do not stop people from buying houses.
“Looking back in the past decade, interest rates were as high as 15-16% when the demand for housing loans was still in healthy numbers at that time,” he said.
On Saturday, HDFC raised its loan rate by 50 bps, effective Monday.
Bankers argue that borrowers are prepared for higher interest rates and say when the loan becomes floating, it does not hit the consumer hard.
“Servicing loan for an alert consumer is not a concern at all,” said R.K. Bakshi, executive director of Bank of Baroda. “Concern emerges if the borrower is over-leveraged. Before giving the loans, banks had studied the repayment capacity of the borrower. Yes, there will be a bit pain, but that is nothing that cannot be adjusted to.”
Not only consumers, a rapid rise in cost of funds since January will also derail consumption demand from companies.
Verma from Nomura said that tight banking liquidity in the second half of 2010-11 had already pushed companies away from banks towards more expensive open market borrowing.
“Now these hikes mean that even bank rates are higher,” she said.
The rise in rates in the last four months has been too quick for even the large companies to adjust to, but it is also a reflection of the urgency with which rates were cut to 4.75% in April 2009 in light of the global financial crisis from a peak of 9% in July 2008.
Samiran Chakraborty, head India research at Standard Chartered Plc, puts the quantum of increase in the cost of funds at 250-300 bps since October last year.
“The obvious way to judge the increase in cost of funds is through mortgage EMIs, but since in our country lenders increase the tenure of loans, it becomes difficult to calculate the actual impact,” he said.
Chakraborty also points to the rise on the yield of the three-month commercial paper.
“From 7.5% in October last year, the three-month rate is up 225 bps to 9.75%, an indication of how expensive it has become for companies to raise money,” he said. Both Verma and Chakraborty said the increase in cost of funds will force both banks as well as companies to look to cheaper funds abroad.
Besides the need for funds, the huge interest rate differential between the US and India could also fuel funds’ borrowing from abroad. The difference between India’s benchmark repo rate and the US Federal Reserve’s Target Fund rate is 7%, with the Fed rate at 0.25%.
Indian firms have borrowed $25.77 billion through external commercial borrowings in 2010-11, up from $21.67 billion in 2009-10, RBI data shows. That’s still lower than the $30.96 billion companies borrowed through this route in 2007-08.
Verma also expects banks to borrow $9-10 billion in 2010-11 from around $2 billion in 2009-10.
“Top-tier companies can still access foreign markets but for smaller companies access to funds will be more difficult so we may see some projects being shelved,” she said.