Cherian Thomas, Bloomberg
Kyoto: India’s mortgage defaults may rise as higher interest rates hit the fastest-growing segment of the nation’s banking industry, said S. Sridhar, chairman, National Housing Bank, the monopoly lender to home loan companies.
The Reserve Bank of India may be “restrained” from raising rates further to tackle inflation because of the risk of an increase in bad debts, which have never crossed 2% of banks’ advances to home-loan borrowers, Sridhar said.
Rising interest rates and concerns of defaults have caused property prices in New Delhi and Mumbai, India’s biggest cities, to decline an average 15% in the past six months after having risen 60% in the two years to September, Sridhar said. The Reserve Bank may be near the end of its 2 1/2 year policy of raising rates, nine of 11 economists in a Bloomberg News survey said last month.
“Interest rates going up the way it did is a concern as it impacts on peoples’ financial leveraging,” Sridhar said. “Bank chairmen have mentioned that bad debts are rising. The trend of falling property prices will get accentuated.”
Sridhar said data on defaults come with a time lag.
To reduce the impact of rising rates on mortgage lenders, the central bank on 24 April cut the so-called risk-weighting on home loans of as much as Rs2 million ($49,248) to 50% from 75%.
“The decision is important because it signals that the Reserve Bank is willing to look at a differential rate regime to spare the home loan borrowers,” Sridhar said.
Home loans grew by about 35% in the past seven years as higher salaries made housing affordable. Salaries in India may rise 15% this year, the fastest pace in Asia, according to Hewitt Associates Inc., a human resources company based in Lincolnshire, Illinois. Salaries rose 13.8% in 2006, the fastest in the Asia-Pacific region, it said.
The Reserve Bank, which is concerned about the record bank lending that has kept inflation above its target rate of 5 percent since September, raised its benchmark interest rate five times in the past year to a five-year high.
Since December, the central bank has also increased the cash reserve ratio, or the amount of cash that banks must set aside against their deposits, three times to curb lending.
In response, ICICI Bank Ltd, India’s biggest home mortgage lender, has increased interest rates on home loans four times since December.
The Reserve Bank on 24 April cut its inflation forecast for this year while keeping borrowing costs unchanged, raising optimism among some bankers that the central bank may soon end the nine rate increases it effected since October 2004.
“Interest rates may have almost peaked,” said Industrial Development Bank of India Chairman V. P. Shetty. “It can’t rise at the same pace as it has done in the past year, because it will have a bearing on bad debt.”
— With reporting by Gautam Chakravorthy in Mumbai