Asset reconstruction firms that are in the business of buying bad loans from commercial banks and making money by recovering them have now set their eyes on stressed home loans.
So far, their focus has been only on loans to corporations that have turned sticky. Now they are sensing business in the home-loan segment as some mortgage businesses have started showing cracks.
According to industry estimates, the quantum of sticky loans in the home-loan segment have risen 33% to Rs6,000 crore in March 2007 from Rs4,500 crore in March 2006. As the total housing-loan portfolio of banks and housing finance firms is about Rs2 lakh crore, in percentage term, bad loans are about 3%.
However, some banks have even 7% bad loans in their home-loan portfolio. Analysts attribute this to banks’ over-aggressiveness in chasing retail assets. Meanwhile, some bank executives now predict that the quantum of bad home loans will go up to Rs12,000-15,000 crore in the next three years.
Asset Reconstruction (India) Ltd (Arcil), the largest domestic asset reconstruction company, says it plans to buy bad home loans worth at least Rs50 crore in May. Another, Mumbai-based Pegasus Asset Reconstruction Pvt. Ltd, also plans to test the waters in this business. It will initially buy Rs10-20 crore worth of bad home loans.
Says S. Khasnobis, managing director and CEO of Arcil: “We are doing a health check on home-loan portfolios of some banks. They normally outsource recovery of defaulting loans to direct selling agents. If a third-party, fee-based recovery model is put into place with the reputation of an established asset reconstruction company, it will be a win-win situation for both banks and us. Besides, the customers would be more cautious.”
With regulator Reserve Bank of India tightening liquidity and raising rates at regular intervals, interest rates on home loans have moved from a low of around 7.5% in 2004 to over 12% in April 2007. “With loan rates going up, there have been stray cases of defaults as some of the customers are not able to bear the burden of higher monthly instalments that they need to pay to banks,” said a senior banker who didn’t want to be named.
“The situation will turn worse if real-estate prices crash. In that case, customers, some of whom are investors, will end up holding assets that have seen steep price erosion.”
In such a scenario, even if a bank seizes an asset, it will not be able to quickly recover the money after selling it.
The retail banking boom in India has seen the home-loan portfolio of commercial banks growing at a fast pace. In the retail loan arena, home-loan growth has been the highest for the largest providers of mortgage in the country, ICICI Bank Ltd. For India’s older mortgage player, the Housing Development Finance Corp. (HDFC) and largest commercial bank State Bank of India (SBI), the home-loan portfolio has been growing at an average 35-40%.
As on 31 March 2007, the total home-loan book of SBI was Rs38,000 crore. HDFC’s mortgage book stood at Rs53,000 crore as on 31 December 2006, and that of ICICI Bank at Rs60,000 crore.
Currently, housing finance firms and commercial banks that finance homes depend on direct selling agents who contact the customer after 90 days of default. These recovery agents have in the past been accused of resorting to strong-arm tactics for recovery of loans without making an effort to understand why there has been a default.
Arcil says it plans to change the rules of the recovery game.
It is in the process of setting up a special purpose vehicle that will function like a trust. The valuation of the sticky home loans will be decided by Arcil taking into consideration the property prices and interest-rate increase cycle. The trust will work on the basis of a fee for recovery. It will employ staff to advise and provide solutions to defaulters.
“We will hire professionals to train our staff,” insists Khasnobis. “These men will be the feet on the street and they will have a human approach to recovery and not threaten people to pay up. Our entire approach will be towards providing solutions and not extracting commission on every recovery.”
Pegasus director Anshul Bhimjyani, director says that unlike corporate loans, in home loans one cannot convert a certain portion of debt into equity.
“Unless there is a sharp drop in property prices or there is a huge build-up of sticky assets on the books of banks that compel them to sell bad loans at a discount, wooing bad home loans may not as attractive as sticky corporate loans,” he noted.