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Banks have been very aggressive on the home loan front in the recent past. The interest rate on home loans offered by almost all major banks is down to less than 7%. In some cases, it is down to as low as 6.5%. Nevertheless, the question is, are the lower interest rates leading to banks drumming up a lot of business on the whole, as has been expected of them.

The answer seems to be no. Take a look at the accompanying chart. It plots the incremental home loans given out by banks as a proportion of incremental retail loans.

Source: Author calculations on data from the Centre for Monitoring Indian Economy.
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Source: Author calculations on data from the Centre for Monitoring Indian Economy.

The chart tells us that the incremental home loans as a proportion of incremental retail loans have been falling from May 2020 onwards, when it was at 64.2%. It stood at 39.6% as of August 2021, as per the latest data which was published yesterday.

What does this mean? The total home loans given by banks as of the end of August 2020 stood at 13.46 trillion. Between then and August 2021, banks gave out fresh home loans and borrowers also repaid home loans they had taken on.

The repayment included regular repayment through EMIs and prepayment through bulk one-off payments. Taking the home loan outstanding as of August 2020, adding fresh home loans given by banks over the next twelve months and subtracting repayment made by borrowers during the period, what we get is the total outstanding home loans of banks as of August 2021.

This stands at 14.7 trillion. Hence, the home loans outstanding or what banks like to call their home loan book, has grown by 1.24 trillion between August 2020 and August 2021.

Using the same logic, we can calculate that the retail loans of banks grew by 3.13 trillion during the same period. This means that incremental home loans now form 39.6% of the overall retail loan growth, the lowest it has been in a while. In May 2020, they had formed 64.2%.

What does this mean? It means that despite home loan interest rates at very low levels, banks have not been able to push them as aggressively as they would have liked them to. More and more non-home loan retail loans are being given out.

It could also mean that past home loans are being repaid at a faster pace. There is some logic to it, simply because a big section of the rich and upper middle class have worked and stayed at home for a while now. This has led to their bank balances growing as regular expenses on various fronts have come down. A part of this balance must have been used to repay loans. Another possibility here is that of gains from the stock market are being used to pay off home loans. When loans are repaid faster, the banks need to give out more loans faster in order to ensure that their loan book also keeps growing at a faster pace. Clearly, that is not happening when it comes to home loans.

Another factor that needs to be kept in mind here is that home loans given to the priority sector have contracted over the last one year. This again shows the negative economic impact of the covid pandemic. Priority sector home loans now form around 32% of the overall outstanding home loans of banks. They were at 38-39% in early 2019. Clearly, the capacity of the lower rung of the society to take on a home loan and repay it, has come down in the last few years. Priority sector home loans are essentially home loans of up to 35 lakh in metropolitan centres with a population of 10 lakhs and 28 lakh otherwise. This is to the condition that the price of the home being bought should be up to 45 lakh and 30 lakh, in metropolitan and non-metropolitan areas, respectively.

All these reasons have ensured that home loans are not bringing cheer to banks as they were expected to.

(Vivek Kaul is the author of Bad Money)

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