Are home loans new risk area for banks?

Banks are getting more careful in disbursing home loans – picking people with higher credit scores, for example – as property prices rise to unsustainable levels.

“Banks have become prudent and are looking at improving the health of their portfolio,” said Arun Thukral, managing director, Credit Information Bureau (India) Ltd, or Cibil.

“Who they lend to has also seen a major shift,” he said. “Earlier, they were lending to a person with a Cibil credit score of 600-700 to buy a house. Today, 60% of the home loans are given to people who have a score of at least 800.”

Indians are getting more leveraged than they were a decade back as salary increases have not kept pace with spike in home prices, burdening them with larger monthly loan payments. Experts fear that a more leveraged consumer, coupled with inflated home prices, can pose a risk to banks’ balance sheets.

Home prices in the metros have doubled in the last five years despite an economic downturn, according to data released by the National Housing Bank.

“The business is therefore prone to asset quality pressures, particularly if collateral values of the two most popular products – residential mortgage and gold loans – were to fall significantly,” said Ananda Bhoumik, analyst, India Ratings & Research.

Indian banks have changed gears in recent past, sharpening focus on retail loans as credit off-take on the corporate side remains subdued and uncertain. As such, consumer loans are considered a safer option as corporate bad loans soar in the sluggish economy. But there’s no undermining the risk here, too.

“Banks will have to recognise that retail credit comes with its own risks, exposing them to individuals in large volumes as against one corporate loan. The whole appraisal process and risk underwriting process has to recognise that,” said Satish Mehta, co-founder and director at Credexpert, a credit counselling company.

Though the mortgage-to-gross domestic product ratio remains low at 7% in India, most of the loan amount is skewed towards urban India. While no one expects property or gold prices to come crashing down any time soon, credit bureaus recognise the systemic risk.

“If the price of the collateral falls, then the risk that banks are carrying definitely goes up,” said Mohan Jayaraman, managing director at Experian Credit Information Company of India Pvt Ltd. “Due to this, many mortgage lenders are also getting into the theme of saying that they will do smaller ticket lending and the whole affordable housing thing is being taken more seriously now.”

Source: Secondary