The Daily Reckoning by Vivek Kaul
On This Day - 24 July 2015
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Will home loans be the next big worry for banks? A  A  A

- By Vivek Kaul

Vivek Kaul
I am amazed at the strong belief that people have that real estate prices will never fall. Every time I write a column on real estate readers get back to me with newer theories on why I am wrong. A new theory that was put forward (actually it is not so new, just that no one had come back to me with this theory for a while) to me on Twitter was that the government won’t allow real estate prices to fall.

To this another Twitter follower replied by saying that if real estate prices can fall in China (where the government is far bigger and has a lot more control over things than in India) then they can fall in India as well. Guess that is a fair point.

Anyway, this column is really not about why real estate prices will fall (in fact they have already started to fall). That bit I am already convinced about, I just need to keep reiterating it for the benefits of the believers who don’t see it coming.

What I am worried about is what will happen in the aftermath of home prices falling. Banks clearly have a reason to worry. And here is why.

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Every month the Reserve Bank of India (RBI) puts out data regarding the sectoral deployment of credit by scheduled commercial banks operating in the country. For a period of one year ending May 29, 2015, the total lending by banks grew by 8.5% to Rs 61,51,600 crore. During the same period, the total amount of home loans given by banks grew by 17.1% to Rs 6,48,400 crore.

Now compare this to what happened during the period of one year ending May 30, 2014. The overall bank lending had grown by 12.7% to Rs 56,684,00 crore. In comparison the total amount of home loan given out by banks had grown at a similar 17% to Rs 5,53,800 crore.

If we go back a year further to May end 2013, the overall growth in bank lending had stood at 15.3% whereas home loans grew by 18.4%. (Actually the period here is a little more than a year, between May 18, 2012 and May 31, 2013).

What this clearly tells us is that even though the overall growth of lending by banks has considerably slowed down, the growth in home loan lending continues at almost the same pace. What conclusion can be draw here? The RBI does not give out the total number of home loans that banks are giving out. Neither does it tell us the average size of a home loan.

Nevertheless, one explanation for home loans continuing to grow can be that the increase in the price of homes has also led to the increase in the average size of home loans.

What happens if we look at the data a little differently? Over the one year period ending May 29, 2015, the total lending of Indian banks grew by Rs 4,83,210 crore. During the same period the total amount of home loans grew by Rs 94,590 crore. Hence, home loans constituted around 19.6% of bank lending during the last one year.

What was the scene a year back? For the one year period ending May 30, 2014, the total lending of Indian banks grew by Rs 6,40,570 crore. Home loans had grown by Rs 80,260 crore during the same period. Hence, home loans constituted 12.5% of the lending during the course of the period.

For the period of one year ending May 31, 2013, home loans constituted around 11% of the overall lending by banks. (As mentioned earlier, the period here was a little more than a year, between May 18, 2012 and May 31, 2013).
Now what does this tell us? With overall bank lending slowing down, banks have increasingly become dependent on home loans. As Deepak Shenoy of Capital Mind puts it: "the demand for housing loans is pretty much the only game in town for the banks."

Home loans were formed 11% of the total loans given out during the period of one year ending May 2013. This number jumped to 12.5% during the period of one year ending May 2014. And for the period of one year ending May 2015, home loans amounted to 19.6% of the overall portfolio.

Things get even more complicated once we look at the divide between priority sector home loans and other home loans. Home loans of up to Rs 25 lakh get categorised as priority sector loans.

For the period of one year ending May 29, 2015, priority sector home loans grew by just 4.9%. On the other hand home loans of value greater than Rs 25 lakh grew by 32.2%. Hence, higher value home loans are growing at a significantly faster rate. For the period of one year ending May 30, 2014, priority sector home loans had grown by a much faster 8.7%. The home loans greater than Rs 25 lakh had grown by around 29.1%.

The problem is that with the real estate bubble starting to loose fizz banks are likely to face the next spate of bad loans from the home loans that they have given out. I might be jumping the gun here a little, but the numbers show an increasing dependence of banks on home loans and that is clearly not a good sign.

As the analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: "Over the last decade, the combined real estate portfolios of banks and NBFCs have increased at a CAGR[compounded annual growth rate] of ~20%. A breakup of this growth between value and volume shows that two-thirds of this growth has been driven by increased ticket sizes (due to the continued increase in ticket sizes), and volume growth for the sector has been relatively modest at ~8-9% CAGR over the last 10 years."

This is going to change in the days to come. As Mukherjea and Shekhar write: "Housing finance companies/banks would be an obvious casualty if real estate prices correct."

Disclosure: The idea for writing this column came after reading Capital Mind’s research report titled Bank NPAs Show Alarming Signs, Add to Woes of the Sector

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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11 Responses to "Will home loans be the next big worry for banks?"

Ankur Agrawal

May 5, 2016

Thank you sir. Just one quesn: wouldn't it actually make sense for banks to increase their home loan portfolio give the buffer they have on property value due to the black component? Unless, there is a reason to believe that prop prices might correct by more than 50%

Please let me know your views on this very crucial point.

Regards

Like 

shrikantpkulkarni

Sep 18, 2015

Everybody is talking of real estates/home loans/steel & cement /power etc. what about Agril? See the % in NPA. After the 2009 when
Rs. 74000 Crs waived by the then Govt, leave aside big farmers even small farmers tends not to pay in anticipation of after every five years new govt will waive their outstandings. This cult is slowly & gradually developing. Instead of making farmers making strong and give them hand to stand on their legs every subsequent whether it is Central/State offering waivers at the cost of tax payers Who is responsible ? Are we going to learn any lesson? Seed/fertiliser/electricity subsidy... exemplary cases to think seriously.

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vishal

Aug 18, 2015

I am chartered accountant by profession.Real estate prices in india cannot drop due to following reasons
1. Day by day availability of labours would be a question due to 5lakh crore of infra creation activities started by Modi government .
2. Cement and steel prices are bound to sky rocket due to huge consumption by new infra creation by govt.
3. Taxation is Real estate is as follows Stamp Duty & Reg -6% , VAT -3.09%,Premiums - 11% (Rs.700/Sq.ft)for plan sanctions, LBT -1%(Rs.50/Sq.Ft).26% of the flat value is taken by government directly and I am not even considering sales tax, composite tax and vat on all the bills paid by builder which is 14% additional. 26% +14$ = 40% .Bribes or liasoning charges --10% (Rs.500/Sq.ft)
Apart from this 2 -3 years period & 70plus permissions to start a project,calculate the interest cost on funds invested and land cost is double on paper itself.
I really doubt builder is earning anything in current market, chances of prices going down is 10% but if market moves upwards it will move by atleast 40 -50% ,I think it is great time to invest in such a low risk market as no body can catch exact breaking point.(better to be safe).

Like (1)

AB Pereira

Jul 28, 2015

Compared with corporate loans and priority sector loans, home loans are secured loans for which lesser risk weight is assigned under capital adequacy norms. Also, most of these loans are secured against a regular stream of revenue for the borrower (salary or business income) and in case of default, the bank will have decent security. Considering the security margins of 20-25%, it is not likely that the RE prices will correct to that extent, and even if they do, banks will not lose much.
The concern is, when banks finance two dimensions of the same real estate - one to the builder as business loans and then to the customer as home loans! that will be like double counting on the same security which can create a scenario like the sub prime crisis.

Like (1)

Dr. Anilkumar Garag

Jul 24, 2015

I agree to the argument that real estate prices in India can FALL. but i do not see any reason to be afraid of the fallout of this on the banks. the reason is elaborated below in simple terms.

In India if I were to buy a house worth Rs. 100 then I am expected to pay Rs.25 by cash and another Rs.15 by way of down payment to the bank. effectively, the bank would have lent Rs. 60 for a real estate transaction of Rs. 100.

If a real estate crash has to significantly impact the Banking sector then the prices will have to crash by at least 40%.

Like (1)

gupta boggarapu

Jul 24, 2015

Bubble or no bubble, there are few macros that support real estate. they are:
1. ever increasing population.
2. rapid urbanization.
3. run away inflation (in India)
4. bad/unscientific policies that govern real estate.
5. constant destruction of public wealth by government/vested interests (consequent decline in rupee - real - value).
6. massive amounts of black money generated in the system.
7. near zero percent interest in the west making NRIs to look at Indian real estate as an investment option.
8. add to the above, foreign flows - a relatively recent phenomenon.

Having said the above, affordability is and always was an issue. But it has not dented the demand greatly.

Pace at which real estate prices increase may slow down but may not fall drastically (barring some cyclical corrections). However if the world economy goes into secular deflation/contraction then India may not escape. I have no views on world economy.

Like (1)

Arunotpal Kanti Roy

Jul 24, 2015

Dear Vivek,

I work in the financial advisory business. Over the last several years I have noticed that the Real Estate is accessing money from funds- VCF, AIF and PE funds. These funds are targetting an IRR of 25% p.a. Some Real Estate companies are also issuing NCDs at 20-25% p.a... I read your articles and it seems that fall in prices is imminent but if the prices are falling how come these funds are able to raise huge sums from investors? Due to the short-sightedness of SEBI and AMFI, a lot of advisors are directing money to these Real Estate Backed Investment Options where the pay-off is now several times higher that what can be had from Mutual Funds. So it'll be some time before prices correct significantly.

Like (1)

Girish Patkar

Jul 24, 2015

Real estate prices in India defy all economic theory. If economic theory of demand, supply, cost etc. was applicable to Indian real estate business, then prices should have come off during the previous five years. Prices will not come off because of the safety net provided by the lenders. Another reason for the prices to hold is the type of financiers in the business who are not worried about return on capital.

Till such time HFCs and Commercial banks do not throw the Sarfesi Act at developers, price dropping will only remain a dream.

Like (1)

Nitin Taregharkar

Jul 24, 2015

Banks are aggressively wooing home loan customers with the assumption that there will be less number of defaulters compared to debt ridden industries. As one or two big accounts when turn bad, can tilt the bank NPA unfavorably. Please let us know the percentage of home loans tuned bad over the years.

Like (1)

Sritanu Chatterjee

Jul 24, 2015

Let us little bit rewind to recently concluded subprime mortgage crisis and my learnings from it. Subprime mortgage crisis started when banks started disbursing loans without looking into the income of the borrower. Those borrowers were called NINJA (No Income No Job No Assets). If the value of real estate declines banks will be only affected if borrowers start defaulting on the payment. This is unlikely to happen for fisrt time home buyers. This risk may emerge for borrowers who have taken loan for investing in a home. That too as mentioned by Mr. Kaul will happen where the returns from investment will be lower than that in gold or equity market. For e.g. gold prices have corrected by around 20% but have Indian women started selling their ornaments. No ! They will once again start buying.

NPAs for banks will only happen if India faces a recession where borrowers can not pay their EMI or there is sudden increase in mortgage rate for existing customers.

Macroprudential policies like LTV already takes care of such a scenario. NPAs happen when borrower does not suffer erosion in his equity portion. Since LTV is there - a default of home loan will wash away the equity part of the borrower. Which again home buyers will think twice before taking a decision.

I also believe real estate prices will correct but I am not sure if that will lead to accumultation of NPAs for the home loan category of banks.

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