Thirty-year-old Ramesh dreads the word EMI. Over the last one year, the repayment for his Rs 10-lakh housing loan has become costlier by Rs 2,300 a month.

His banker is worried too. Lenders fear the ability of Ramesh and thousands more like him to keep paying the equated monthly instalment that has been rising steadily with the 2.75 percentage points jump in lending rates over the last one year.

As borrowers' monthly budgets get stretched with the rising cost of living and mounting EMIs, bankers fear a knock-on impact. If home loan borrowers fall behind on repayments, banks will have to downgrade the loans to the non-performing category.

Most sensitive to the interest rate hikes would be those in the low- and middle-income groups compared with those in the upper-middle and high-income segments.

Delinquency on the rise

Bankers' fears are not unfounded. According to data submitted by 24 public sector banks (barring Canara Bank and Punjab & Sind Bank) to the Finance Ministry, as on March-end 2011, bad loans in the up-to-Rs 2 lakh home loan segment were the highest at 6 per cent. Homes loans in the over Rs 25 lakh segment saw a lower delinquency rate of 1.56 per cent.

Bad loans in the Rs 2-lakh to Rs 5-lakh home loan segment were at 4.84 per cent; in the Rs 5-lakh to Rs 10 lakh segment, bad loans stood at 3.68 per cent; and in the Rs 10 lakh to Rs 25 lakh home loan segment, at 2.56 per cent.

“The interest rate burden on home loan borrowers in the low and lower middle income segments has increased significantly in the last one year. Due to this, there could be a rise in delinquencies of lending institutions,” said Mr R.V. Verma, Chairman and Managing Director, National Housing Bank.

Pointing out that during the course of an elongated property cycle, three-four interest rate cycles could play out, Mr Verma said only consumers who are end-users are venturing to buy homes in the current rising interest rate regime as they are apprehensive that property prices would rise even more if they wait for interest rates to fall. Those planning to buy a second home or those buying for investment purposes are staying out due to high property prices and rising interest rates.

Extending tenor

To help borrowers cope, some banks are extending the tenor of the loan so that the EMI stays constant. However, if the extended tenor exceeds the retirement age of the borrower, then borrowers have to fork out higher EMIs.

“Delinquencies in home loans could start surfacing in the interest-rate-sensitive borrower segments. Those who have taken home loans in the last few months in the rising interest rate regime may not feel the pinch as much as those who took loans over a year ago,” said a senior public sector bank official.

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