Loan defaults loom as home rates seen rising
Bankers believe that any move by regulator to tighten monetary measures will lead to ‘negative amortisation’.
By Atmadip Ray, TNN |
KOLKATA: With talk of a tighter monetary regime to rein in inflation getting louder by the minute, home loan providers are somewhat jittery. A large chunk of home loan players believe any tightening would force banks and housing finance companies (HFCs) to raise home loan rates further.
In that event, borrowers, especially those who���ve taken loans at lower rates of around 7-8% a few years ago, may have to live with the perils of facing a condition best known as negative amortisation in financial jargon.
Simply put, negative amortisation is a situation, when repayment of loans does not cover the amount of interest due for that particular loan period. This ultimately leads to a default. Borrowers with longer repayment periods face such problems when interest rates keep increasing over the years.
In that event, borrowers, especially those who���ve taken loans at lower rates of around 7-8% a few years ago, may have to live with the perils of facing a condition best known as negative amortisation in financial jargon.
Simply put, negative amortisation is a situation, when repayment of loans does not cover the amount of interest due for that particular loan period. This ultimately leads to a default. Borrowers with longer repayment periods face such problems when interest rates keep increasing over the years.
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���We���ve encountered such situations last year, when interest rates rose more than once in a short period,��� said a senior official with a prominent HFC. This, typically, happens, when the tenure of a loan is 20 years or more.
���Loans with a 20-year repayment period should be restricted and be allowed if an income installment ratio (IIR) is not more than 30-35%. When the IIR is low, there can be room for increasing the EMI to cover any rise in interest rate increase,��� said DHFL Vysya Housing Finance managing director R Nambirajan.
Typically, home loan rates are now hovering between 9.5-12.5%. Industry watchers believe every rise in rates from here on will make loan repayment a lot more strenuous with the extended loan tenure. ���Monetary measures like a CRR hike would certainly push the home loan rates upward,��� felt GIC Housing Finance vice-president Rajib De.
A good number of bankers and bond traders anticipate a CRR hike to the extent of 50 bps from the current level of 7.5%. A senior official at HDFC said: ���With inflation on the higher side, it is likely to push interest rates up. We are waiting for RBI to unveil its monetory policy before we take a call on home loan interest rate movements.���
And HFCs, which borrow funds from commercial banks, would typically be on a disadvantageous position. ���Barring just a few banks, most have not reduced their prime lending rates despite repeated prodding by the finance minister. Therefore, cost of funds for most HFCs are already at a higher range of 9-10%,��� another HFC official indicated.
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