The Hindu Business Line : Realty loans turning sticky for banks

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Realty loans turning sticky for banks

C. Shivkumar

EMI defaults on the rise; tenures get stretched

`A substantial chunk of the NPAs came from organised builders and large housing projects. The situation was similar in both public and private sector banks.'

Bangalore April 2 Realty loans, once ardently wooed, are now turning sour for banks as non-performing assets start mounting.

A chief executive of a public sector bank, who declined to be identified, said the realty non-performing loans (NPL) portfolio of his bank was as high as 3 per cent of the gross housing loan assets.

Under current regulations, if the debt service payments are overdue for more than 90 days, the loans automatically become NPAs. "There are payment overdues of more than 90 days," he said.

The CEO said that a substantial chunk of the NPLs came from organised builders and large housing projects. The situation was similar in almost all the public and private sector banks in the country, he added.

In some of the banks, the NPLs were as high as 4 per cent, bankers said.

Steep increases in home loan rates over the last three years have also contributed to the deterioration in asset books, the bankers said.

The worst affected were floating rate borrowers. Many customers had borrowed floating rate loans when interest rates were as low as 7.25 and 7.5 per cent.

The same borrowers were currently forced to cough up double-digit rates on the loans now, leading to a sharp increase in debt service payments.

Home loan rates range between 10.5 and 12 per cent. The rate increases have also resulted in debt repayments becoming more than the standard eligibility guidelines applied. Currently the eligibility criterion is that monthly debt service or equated monthly instalments should be 40 per cent or lower of the income.

Delinquencies may mount

As a result, bankers fear that the home loan delinquencies were likely to mount further in the coming months, especially in floating rate loans. Such a situation could also mean shrinking bottom lines and higher provisions, the bankers said.

Banks, consequently, are beginning to resort to unconventional methods to avert the situation.

Canfin Homes Ltd's Director, Mr J Subba Rao, said, "We are persuading customers to pay on time." But, unconventional methods also implied altering loan covenants. Mr Subba Rao said, "We have the discretion to stretch the maturity of the home loan, and we are applying it in some cases."

This implied that the tenure where the borrowers had raised the funds only for 10 years, would now become 15 years. Some private sector banks that have extended high value loans have stretched the maturity to 25 years.

For the banks, this meant the loans would continue to remain standard asset on its books. T

his also allowed the banks to realise the income on the loan and at the same time averted the need to make provisions for substandard assets.

Protecting bottom line

Bottom lines consequently stood protected. In the case of fixed rate loans, the bankers said, they were not prepared to exercise the interest rate reset clauses as provided in the covenants, for fear of converting the assets into NPLs.

The cost in such a situation would be more for the bank, and therefore for the time being some of the banks have decided to absorb the losses.