Why the State Bank of India is in love with home loans

Aug 27, 2015

- By Vivek Kaul

Vivek Kaul
In yesterday's edition of The Daily Reckoning, I had discussed why teaser rate home loans are a bad idea. Arundhati Bhattacharya, the chairperson of the State Bank of India (SBI), recently put forward the idea that the country's largest bank should be allowed to launch teaser rate home loans.

As I had explained yesterday, teaser home loans are essentially home loans in which the interest rate is fixed in the initial years and is lower than the normal floating interest rate on a home loan. The lower interest rate is limited only to the first two-three years after which the loan is priced at the prevailing interest rate on home loans.

The question is, why does Bhattacharya want to launch teaser rate home loans? Let's look at some numbers of SBI. As on June 30, 2015, the bank had given out home loans worth Rs 1,63,678 crore, having grown by a robust 13.5% since June 30, 2014.This, when the overall domestic lending grew by a much slower 5.38%.

Between June 30, 2014 and June 30, 2015, the bank gave out home loans worth Rs 19,468 crore. Where did the overall lending stood at? The total domestic lending of the bank grew by Rs 54,255 crore during the same period. Hence, home loans formed a massive 35.9% of the total lending that SBI has done within India, between June 2014 and June 2015.

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To rephrase the earlier sentence, more than one third of all domestic lending of SBI, over the last one year, has been in the form of home loans. For a diversified bank, which is not just a home loan company, this skew is way too pronounced.

Nevertheless, even after this, why does Bhattacharya want to give out more home loans, by launching teaser rate home loans? In order to answer this question I would need the average home loan size of SBI. I found two newsreports, which gave me two very different numbers. One report published in October 2014, quoted a senior SBI executive said that the average home loan size in case of SBI was at Rs 30-32 lakh. Another report published in April 2015 said that the average home loan size in case of SBI was at Rs 20 lakh.

The second number seems to me more believable given that the average home loan size of HDFC is Rs 23.4 lakh (HDFC shares its average home loan size every quarter). My guess is that the average home loan size of SBI would be a little lower than that of HDFC, given its better reach.

So we will work with an average home loan size of Rs 20 lakh. The next number needed is that home loan to value ratio, at the time the loan is given out. I couldn't find that number for SBI (dear reader, hope you understand how difficult it is to get numbers on anything in India, despite the improvement over the years).

The number in case of HDFC is 65%. What this means is that on an average HDFC gives 65% of the market value of a home being bought, as a home loan. If we work with this number, the average market price of a home that SBI is giving a loan against is around Rs 31 lakh (Rs 20 lakh divided by 0.65). But this does not take one factor into account.

Almost no real estate deal in India is carried out totally in white money. There is a portion of black money that inevitably needs to be paid. It is very difficult to arrive at an all India number, but my guess is that 75:25 is a good conservative ratio to work with. This means that 75% of the value of the home is paid in white and the remaining in black.

Once this factor is taken into account the market price against which a home loan is given, shoots up to around Rs 41 lakh (Rs 31 lakh divided by 0.75). What does this mean? This means that the loan to value ratio is a little under 50% (Rs 20 lakh expressed as a percentage of Rs 41 lakh).

Hence, giving out home loans is a very safe form of lending. In fact, it is the safest form of lending. For mid-level companies, bad loans were at 10.3%. So for every Rs 100 that SBI gave as loans to mid-level companies, a little over Rs 10 wasn't repaid.

For, retail loans the bad loans were at 1.17%. The bank does not give a separate number for home loans. Auto loans, education loans and personal loans, are the other forms of retail loans. The default rates in case of these loans is likely to be higher. Hence, the bad loans case of home loans should be lower than 1.17%.

The bad loans in case of HDFC amount to 0.54% of the total loans. What this means clearly is that almost no one who takes on a home loan defaults on it. Given this, it is not surprising that Bhattacharya wants to be allowed to launch teaser rate home loans. It is better for her to do that than be lending to corporates. As Bhattacharya had said: "This is one portfolio where NPAs are the lowest."

The fundamental problem with teaser rate home loans is that a bank cannot be allowed to give out a loan at a rate of interest lower than its base rate or the minimum interest rate a bank charges its customers. Also, they cannot really be compared to normal home loans, given that the chances of the EMI jumping up in the years to come is significantly higher in case of teaser home loans. And that is a risk that Bhattacharya probably hasn't taken into account.

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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9 Responses to "Why the State Bank of India is in love with home loans"

Manny Reddy

Oct 14, 2015

Vivek wants SBI to lend money to big corporations. This is because SBI has enough better performing home loans for now to offset for any losses from the big corporation.



Aug 27, 2015

I believe Vivek is super pessimistic and a very negative guy who tries to find a bad thing even in a good thing. As I earlier said who is going to decide whether in next 2 years interest rates will increase or decline. The chances are they will decline. Why to believe people will default once interest rate increases considering that year on year most people make more money as there experience/goodwill increase. Also knowing that loan to value is very comfortable people may sell the house rather than default.

Like (2)


Aug 27, 2015

Every business prefers to sell a product which makes highest profit. If SBI wants to sell more home loans what is the problem in that.

Like (1)


Aug 27, 2015

Dear Vivek,

I had been reading your articles on Real Estate and Home Loans for the past few weeks. Your observations with respect to the pricing of real estate were very good and I appreciate your efforts in collating enormous data around the sector.

However, I do not find your observations on teaser home loans that correct, as I see two sides of the same coin. While your comments ( reproduced below ) is not realistic QUOTE Also, they cannot really be compared to normal home loans, given that the chances of the EMI jumping up in the years to come is significantly higher in case of teaser home loans. And that is a risk that Bhattacharya probably hasn't taken into account. UNQUOTE

In fact, the EMI is lower for the first three years, as compared to the EMI on the market determined interest rates. It does not jump higher with respect to the market after the initial three years, whereas the EMI stays on the market determined interest rates.

In yester years, RBI used to FIX interest rates. Now, it is the Banks ( I see it as coterie of Banks ). The coterie does not even want to pass on the RBI initiated rate cut to the consumers. The coterie emulates the Government ( example, the Government does not want to pass on the benefit of fallen crude oil prices to the consumers, but take full benefit of the fall in prices ).


Like (1)

Nitin Taregharkar

Aug 27, 2015

Dear Mr. Kaul,
There are certain details missing in your article. Now a days several builders offer 100% white payment facility.They pad up the cost of of the house under the guise of different heads like development charges, floor rise charges etc. so that the buyer pays exorbitant price with respect to the actual carpet area. So the builder does not mind giving the receipt of entire amount which highly inflated price for the house. Secondly SBI has the strictest norms and valuation processes so that the percentage of default is less. If the chairperson is trying to lend the money to the safest segment that too transparently to keep the balance sheet healthy, why it should be taken as something wrong ?

Like (1)

Tushar Shah

Aug 27, 2015


You rightly demonstrated that home loans are less risky. It follows that the interest rate charged on such safe loans should also be less as the risk premium would be very low. Your logic justifies SBI's strategy of offering lower interest rate for home loans. Of course, the gimmicks of teaser loans of lower interest rate for 2 yrs should also be avoided.

You are correct that lowering interest rate on home loans would benefit the builders, who are making obscene profits at the expense of common people.

It is logical to charge substantially higher interest rates to builders as loans to them are highly leveraged and often based on fictitious value. The amount lent to builders should also be drastically reduced in view of the risk and fictitious values. It makes financial sense.

The social justice would be served if builders are charged much higher interest rate and are asked to offer higher collateral while simultaneously, common people are charged a lower interest rate for home loans and are offered higher ratio of loan to the value. This would give incentive to builders to liquidate their inventory at a reasonable price.

This strategy may also start a virtuous cycle of lower home price leading to higher demand, lowering the cost of construction and benefitting the common people.


Like (1)


Aug 27, 2015

The home loan is the safest loan may be because the housing prices have been going up every year.

Has such study been made in the market where home prices are in a downtrend for say 3-5 years? It'd be interesting to know.

If investor has bought a house and flipped over after 5 years, he'd be able to repay the loan. But if the prices go down, we may have more defaults in home loan segment as well.

If banks foreclose such properties and start selling at the value of principal (which is 50% of the total cost as per this article) or even at 20% discount to market rate, it further depress the sector. There'd be domino effect.

Like (1)


Aug 27, 2015

Does it mean that reducing int rates will in all probability will go to builder lobby. Looks like Mr.jetly is feilding for buiders. If builders can afford to carry inventory they might carry it for next few years. Where do they find int free capital. Truely fishy

Like (1)


Aug 27, 2015

Dear Sir,

Yesterday, in your post, you have asked the question why SBI is interested in clearing housing inventory? You have hit the exact point in today's post.

In my experience, I feel HDFC is most strictest lender when it comes to valuation of the house & thus sanction of loan amount.Surprisingly, I have felt leniency in PSU sectors rather. From my dealing, I got ample hints that they actually consider the real market value of the flat including the black-money, not the one which mentioned paper or agreement during sanction of loan.

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