Home loans to self-employed riskier than to salaried workers: India Ratings
Loans to self-employed borrowers are 50% more susceptible to default due to higher income volatility, the agency says
Mumbai: Housing loans to self-employed people are more “susceptible to default" than those given to the salaried class due to possible volatilities in income, India Ratings said on Thursday.
“A study of borrower characteristics suggests that loans to self-employed borrowers are 50% more susceptible to default than those extended to salaried customers because of higher income volatility, which is accentuated during economic downturns," the ratings agency said in a report.
However, it said lenders are conscious of this credit risk and hence, the average rates of interest charged to this category are 0.50% higher than those charged to the salaried borrowers.
The report noted that conservative lending standards and stable interest rates are crucial to the performance of home loan portfolios. “Conservative underwriting standards are crucial to the performance of mortgage loans," the report said, adding that an analysis of data from the last three years has shown that a hike in interest rates increases delinquencies.
It said loans where interest rate moved up by over 2 percentage points were 50% more likely to turn bad than the average during the three-year period.
On the underwriting front, the loan-to-value ratio (LTV) and instalment-to-income ratio (IIR) are also very important, it stressed.
“Loans to residential mortgage borrowers whose repayments were above 50% of their income are found to be riskier, with delinquency rates almost 35% higher than average," India Ratings associate director for structured finance Purav Shah said in the report.
Borrowers who contribute over 40% of residential units have greater willingness to pay as the delinquencies on such loans are 25% lower than the average, it said, adding that the stress increases once the LTV goes up.
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