Active Stocks
Thu Mar 28 2024 15:29:14
  1. Tata Steel share price
  2. 156.10 2.13%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,446.65 0.41%
  1. ITC share price
  2. 427.85 -0.04%
  1. Power Grid Corporation Of India share price
  2. 277.15 2.25%
Business News/ Money / Real Estate/  Housing finance sector may see increase in bad loans
BackBack

Housing finance sector may see increase in bad loans

Greater competition forces lenders into stepping up volume to maintain profit

The housing finance market is expected to grow 20% and reach a size of Rs1.25-1.3 trillion by the end of the current fiscal. Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
The housing finance market is expected to grow 20% and reach a size of Rs1.25-1.3 trillion by the end of the current fiscal. Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

New Delhi: The housing finance industry could be saddled with an increasing number of bad loans as greater competition forces lenders into stepping up volume to maintain profit, according to National Housing Bank chairman R.V. Verma.

The waiver of pre-payment penalty charges has increased rivalry among banks and housing finance companies, which the regulator fears will lead to a dilution in underwriting and appraisal standards.

The Reserve Bank of India (RBI) had ordered the waiver of penalties on early payments of floating-rate loans in October 2011 to ease the burden on borrowers.

“We don’t rule out slight deterioration in quality of assets going forward with volumes expanding quickly and banks leading this growth in terms of competitive pricing," Verma said in an interview.

The housing finance market is expected to grow 20% and reach a size of 1.25-1.3 trillion by the end of the current fiscal, with banks having a two-third share and housing finance companies the rest.

“Waiver of pre-payment penalty has ensured that the movement of consumers across the industry has become more liberal. It will create pressure on margins," Verma said. “It depends on how lenders are going to handle that. If lenders are going to increase volumes to take care of profits, then how the volumes will be increased becomes important. If you are going to serve everyone, then there will be pressure on risk assessment and underwriting."

The current level of non-performing assets for housing finance companies is less than 1%.

To be sure, the central bank has always kept a close eye on real estate borrowing.

In recent years, the Reserve Bank has introduced stricter provisioning norms as well as guidelines for banks to follow while approving loans. It has asked banks to adhere to prescribed loan-to-value ratios and ensure proper documentation of loans.

“Customers should be given the choice of changing their mortgage provider," said Anil Sachidanand, chief executive officer of Dewan Housing Finance Co. Increasingly, borrowers are looking at more than just interest rates and also considering service standards, he said.

Aggressive practices, such as the waiving of processing fees by big banks could be harmful for the industry.

“Waiver of pre-payment penalty is good. But there have been instances where even the cost of acquisition, which is around 1-1.2% for a lender, has been waived," he said.

Housing finance companies typically lend at one-two percentage points more than banks, since the latter are among their source of funds. That edge is persuading many customers shift from housing finance companies to banks.

The share of housing finance companies in the total housing loan market may drop in the coming months if this migration continues, Verma said.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 02 Jan 2013, 11:16 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App