CREDAI Organises Conference on Formulation of Banking Strategy for Real Estate

CREDAI NCR, the Delhi-NCR chapter of the Confederation of Real Estate Developers’ Associations of India (CREDAI), the apex body of real estate in India, organised a conference on Formulation of Banking Strategy & the Economic Outlook for Real Estate for 2010-11 here.

The Summit covered a wide range of topics of interest to the stakeholders in the industry, providing a huge networking opportunity as well as a knowledge sharing platform for the participants to discuss and deliberate on the issues being faced by the sector and the way ahead for the same.

The conference takes place at a time when realty sector is improving, and growth in real estate is aligned to the economic growth of the country, wherein real estate is a vital contributor as residential housing alone contributes over 5% to the country’s GDP at this time. Financing is an integral part of the real estate industry and hence it is imperative that the developers and the finance institutions work closely and in mutual aid to help sustain and develop the growth trajectory of the sector. A constructive dialogue and collaborative strategies between banks and real estate developers have the potential to transform the real estate sector today and build a momentum that can benefit the economy as a whole.

Project financing is one of the critical issues in real estate today, where much needs to be done to ensure smoother operations and growth. Hence, project financing, both in residential as well as commercial realty, requires immediate attention and the conference focussed on the matter in order to arrive at workable solutions in the area.

Issues such as the difficulties in financing for projects as faced by mid and small level developers; the procedural complexities involving legal requirements, low growth rate of real estate loans in recent times; credit crunch faced by the sector heightened by the anti-inflationary measures taken by the RBI; problems faced in risk assessment of projects; and others were discussed in detail as industry stalwarts and experts in the domain shared their views and suggestions on them.

The conference aimed at providing an opportunity to understand the economic outlook and the real estate scenario in the coming year. At the same time, it sought to conceptualize a banking strategy that can address the needs of the real estate sector. Also, developing solutions so as to help generate smoother funds flow in the sector, by addressing the concern areas of both the lenders and the borrowers – i.e. the developers and the finance institutions. The conference also provided an insight to the developers and the bankers to build their portfolio strategies for the year ahead.

Mr. Santosh Rungta, President – CREDAI, said, “With the outlook on the Indian economy and the realty sector improving, it’s a good time to develop a new strategy to look at project financing for real estate in India in both the residential and commercial scenarios. We are hopeful that this initiative will be able to open new avenues for us in the area of project financing and guide us towards effective solutions for the benefit of both the bankers and the developers, eventually aiding the augmentation of the sector as a whole.”

Mr. Pradeep Jain, President – CREDAI NCR, commented, “It is essential that the developers and the financing institutions work in mutual cooperation and understand the issues and complexities involved in the processes from each other’s perspective. We took this initiative in order to facilitate comprehensive and transparent communication amongst the stakeholders so as to help develop effective solutions which would benefit all the parties involved and at the same time ensure sustainable growth and development for the industry.”

The conference witnessed participation from eminent industry stalwarts like S S Kohli, CMD - India Infrastructure Finance Company Limited; Dr. J D Agarwal, Chairman & Director - Indian Institute of Finance; Sandeep Kotak, Executive Vice President, Kotak Mahindra Bank Limited; Punit Malik, Managing Director - Yes Bank; Renu Karnad, Joint Managing Director - HDFC; Deepak Chawla, Advisor Markets - Financial Advisory Services, Ernst & Young; Shanti Ekambaram, Director - Kotak Mahindra Capital; Sunil Rohokale, Executive Director - ASK Investment Holdings Private Ltd. and Rajiv Sabharwal, Senior General Manager - ICICI Bank, among others.

Loan Data from Banks can be a Reliable Source to Monitor Real Estate Prices-RB

Data obtained directly from banks and housing finance companies are considered to be more reliable source of information for monitoring real estate prices. An RBI appointed expert group said such data be collected from the top 13 centres such as Greater Mumbai, Chennai, NCR Delhi, Bangalore, Hyderabad, Kolkata, Pune, Jaipur, Greater Chandigarh, Ahmedabad, Lucknow, Bhopal and Bhubaneswar as these centres are offer a fair regional picture. Most of the banks have real estate property prices indices as they actively provide mortgage and real estate loans, the group said. The Group has also recommended that real estate price index should be compiled in quarterly intervals to capture property price movements on a more frequent basis.

The committee has recommended that while sale and resale prices can be compiled from data from banks, the house rent data be compiled from the official data on house rent index of CPI (Urban) released by CSO. The RBI had set up the committee as lack of transparency in the residential property market transaction, absence of a single centralised regulator, and limited availability of price information were making it difficult to keep track of real estate prices and their subsequent impact. The committee had to develop an information system on asset prices.

The Group has recommended that an annual survey be conducted to supplement the data from banks to ensure the robustness of the data available with the banking system. In its report, the committee has said that RBI should track both sale/resale price index as well as the rent index of real estate prices on a regular basis for effective monitoring.

Risky Business: Are Teaser Rates for Home Loans Pushing Real Estate to the Edge?

Published: February 11, 2010 in India Knowledge@Wharton 

At the Indian Banking Conclave (Bancon) in Mumbai on January 12, Reserve Bank of India (RBI) deputy governor Usha Thorat warned against what she considers risky mortgage lending practices. "In the area of housing loans, teaser rates are increasingly being offered, which is a cause for concern," she said. "I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account the repaying capacity of the borrowers when the rates become normal."
Teaser rates were introduced by banks last year to boost demand for housing finance in a slowing economy. The first off the block was the public sector State Bank of India (SBI) with its Easy Home Loan. Launched in January 2009, when home loans were on offer at interest rates between 8.5% and 11% depending on the amount and the tenor, SBI's rate was 8% for the first year and 8.5% for the next two years. After three years, the terms are highly confusing. According to SBI, the "interest rate after three years may be fixed or floating as per the borrower's choice at the time of sanction. If the floating rate option is chosen, then the rate will be 2.75% below SBAR. If fixed rate option is chosen, then the rate will be 1.25% below SBAR prevailing on the third anniversary date from the date of first disbursement, and shall have a reset frequency of five years from the third anniversary date of the loan. Fixed interest rate shall be subject to [a] force majeure clause."
"SBAR" refers to the State Bank Advance Rate or the Benchmark Prime Lending Rate. And what is the Prime Lending Rate? Beginning June 29, 2009, it was revised to 11.75% per annum; it depends on the RBI's rate and other factors. In other words, the borrowers' monthly payments or equated monthly installments (EMI) three years from now will depend on the SBAR at that time. Little wonder borrowers are befuddled, regardless of whether they opt for fixed or adjustable rate mortgages.
"It is partially correct to state that loan terms are not fully explained to the borrowers," says Sudip Bandyopadhyay, group president of Spice Finance. "It is important to be transparent while providing loans. This does not happen in case of teaser loans." But even the banks have no clue about how much the EMI could be. It depends on the interest rate, and banks are obviously not going to talk about worst-case scenarios.
"While documentation necessarily has to be detailed, there is a strong case to be made for banks being compulsorily required to provide simple illustrations on how floating rates are pegged and what the precise implications are," says Jayesh Desai, national director (infrastructure, real estate and government services), Ernst & Young (E&Y). But it would be unfair to say that banks are taking customers for a ride, he adds.
Thorat's statement about repaying capacity and clarity on obligations drew an immediate response from SBI chairman O.P. Bhatt. "I don't know what the RBI means by teaser loans," he told morning newspaper DNA at the same Bancon a few minutes after Thorat spoke. "It is not right to refer to the 8% home loan scheme as a teaser ... there are no hidden costs in these loans or any add-backs."
On February 5, RBI deputy governor K.C. Chakrabarty added another dimension to the debate. Talking to journalists at a seminar on infrastructure financing in Mumbai, he said: "We have no concern [about] teaser rates." In a lighter vein, he quipped: "What we are telling banks is that you should tease everyone. Don't just tease new customers; also tease old customers by charging a uniform rate for both."
Five days later, on February 10, the RBI stepped in with a circular "to make credit pricing more transparent." Beginning April 1, housing finance can no longer hide behind a wall of banker-speak. A new Base Rate system will be introduced. According to the circular, "Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates charged to major categories of borrowers to the Reserve Bank on a quarterly basis. Apart from transparency, banks should ensure that interest rates charged to customers in the above arrangement are non-discriminatory in nature."

High Interest Rate Regime
The problem for banks is that the country is moving to a high interest rate regime. The RBI credit policy announced on January 29 did not raise interest rates; it only increased the cash reserve ratio (CRR) by 75 basis points. This squeezes liquidity out of the system and helps temper inflation. (See Will Rising Inflation Deflate India's Economic Recovery?) But interest rates are bound to go up; the only question is when. Teaser loans could then become uneconomical for banks. To add its earlier customers to this category will make things worse. On the other hand, if interest rates rise too much, EMIs will climb, squeezing borrowers further.
Bankers say a bubble in India is unlikely for another reason. In the U.S., loans were given based on the value of the asset (the house). In India, the primary yardstick is the capacity of the borrower to repay. Besides, banks in India have been traditionally conservative about lending to individuals.
Despite the insistence of the banks that they check on borrowers' ability to repay, one key issue is how much they are paying for the home in the first place. At the height of the boom two years ago, a mid-market apartment in Mumbai had a price tag of $200,000. This tumbled to $100,000 (in some cases). Buyers who had $170,000 in bank loans suddenly found themselves with a lot of negative equity. For the banks, they would be making significant losses even if they were able to seize the property and sell it off.
Another issue most borrowers don't realize is that most loans have a Depreciation of Security clause. A buyer is expected to contribute 15% of the cost of the house or apartment -- $30,000 in the example given. If the price falls to $100,000, the bank will still finance only 85% of the current cost -- $85,000. The borrower will have to pay the shortfall ($85,000) to avoid being labelled a defaulter. (In loans where shares are pledged as collateral, this has happened very often. Banks ask borrowers to top up their securities when prices fall. If they fail to do so, they sell the shares.)
So why are banks offering teaser rates? The reason is they make money through lending, and today there are limited takers. Banks have too much money sloshing around in their coffers. According to RBI data, by November 20, 2009, personal loans were up a meager 0.7% for the year. Advances against fixed deposits were down 11.80%; on credit cards they were down 24.70%, and on consumer durables down 11.80%. The saving grace was education, where loans went up 31%, and housing, where loans increased by 7.30%. The increase in housing loans was essentially the effect of teaser rates, without which mortgage lending might have declined. Loans to the real estate sector were up 15.30%. This looks fine until compared with the 49% growth of the previous period.
In this environment, once SBI took the plunge, everybody followed suit. When SBI launched its Easy Home Loan, Deepak Parekh, chairman of Housing Development Finance Corporation (HDFC), the country's biggest mortgage lender, declared it a gimmick. A few months later, HDFC itself was offering a similar product. But Parekh continues to insist the teaser loan is "playing with fire." In an interview with business daily Mint, he said: "It's not a very healthy way of lending. It can create problems in the future, particularly if the rates shoot up. Today what we are saying is, if the rate is 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very small. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for the first two years. So, 8% interest could become 12% or even more. Then, the gap will be too much and it's a problem for the individual homeowners.... Financial innovation doesn't take time; if one does it, everyone copies. It can be done in 24 hours. Now most banks have this product." More than 20 banks and housing finance companies in India have launched some variant of the teaser loan.

Competing for Borrowers
"These loan programs have proved to be extremely popular, and any large bank would be interested in getting on such a winning bandwagon," says Anuj Puri, chairman and country head of Jones Lang LaSalle Meghraj, a real estate services firm. "In the end, a successful business entity will not steer away from taking a leaf out of the competition's book." Adds Bandyopadhyay of Spice: "I guess competition forced HDFC to follow this route. They obviously did not want to lose customers."
"Banks as well as HDFC have always had variants of the teaser loan programs," says Desai of E&Y. "They always had floating loans, which were linked to prime lending rates, so you have had situations in the past, too, where interest rates start out low and then move up. Parekh's comment was probably linked to pricing loans initially below the cost of funds."
Business daily Business Standard agrees with Parekh's views about the risks of teaser rates. "Teaser rates are doubtful in themselves, but the experience of the recent global financial crisis makes them more so," the newspaper says in an editorial. "The U.S. sub-prime crisis, where defaults by a large number of home mortgage owners led to the collapse of the housing bubble, which in turn led to the overall financial crisis, was essentially a matter of those who could not afford to service a loan of a particular order for its entire life being lent funds. And this was facilitated by the offer of teaser rates which were to be reset at not-too-late a date, a provision that was part of the fine print which many borrowers initially ignored. With antecedents of this nature, teaser rates should not have been allowed (in India) in the first place. It is not clear why the regulators should have allowed this to happen even while sounding warnings that it is not a good thing. The banks' response, particularly that of SBI, is that it was awash with liquidity at the particular period when the practice was initiated and the stratagem has served its purpose. But this still leaves open the issue of quality of assets which will not be known unless the higher reset rates kick in."
Following the RBI's warnings, some banks have changed course. Two major banks, Canara Bank and Union Bank, have decided to end their teaser loan programs. Axis Bank has withdrawn the teaser loan program it had introduced as recently as January 6. Even Bhatt of SBI seems to have had second thoughts. "We will review the special home loan scheme sometime in March and see what kind of credit offtake has taken place, what kind of liquidity we have, what is the view on lending to various sectors and where we think the cost of funds is heading," he told the Business Standard Banking Round Table in early February.
Bhatt's concern is primarily the SBI's bottom line, not the borrowers' capacity to repay. Still, the two are linked because the quality of the bank's assets depends on the latter. "The points of contention are the short-term impact of low margins of teaser loans on bank balance sheets and the long-term impact on the quality of the loan books the banks build," says Bundeep Singh Rangar, chairman of IndusView, an advisory firm for multinational companies looking at business opportunities in India. "While the short-term pressure on margins is reflected in the debate between Bhatt and Parekh, the differences between SBI and the RBI stem from asset quality issues. The interest rates of such teaser loans automatically reset after the initial relief period. This resetting character of the interest rates is being compared to sub-prime mortgages in the U.S. The key difference, though, is that even these low rates are not being offered to unqualified buyers, only to people with predictable and documented incomes and repayment capacity." The consensus view is that there are dangers, but Indian banks have been much more careful. And the RBI should be able to head off the trend before banks get into serious problems.

Bubble Trouble?
Is a bubble building up in real estate prices? Opinions differ. "There is a recovery in certain pockets only," says Desai of E&Y. Agrees Rangar of IndusView: "The real estate industry is picking up, but slowly and unevenly." Bandyopadhyay of Spice, however, says that the prices of both commercial and residential properties have gone up significantly and they are close to their peaks. "The sharp increase in real estate prices during past six-eight months is definitely a cause of concern," he adds. "A calibrated approach needs to be taken by the regulator in consultation with the banks and the industry to slow down the pace, thereby ensuring more sustainable long-term growth."
The residential market is currently still largely end-user driven," says Puri of James Lang. "While there is a fresh complement of investors on the market as well, wholesale speculation such as we had seen in previous years is definitely not in evidence. It is speculators who create bubbles, not genuine investors." Adds Rangar of IndusView: "We don't believe there is any bubble in the Indian real estate sector."
Rating agency Fitch sees demand picking up but no dangers of overheating. "After a difficult period in early 2009, residential market demand picked up in the second half of 2009, as reflected by the absorption of new projects that were launched at a 25% to 30% discount versus prices during the previous peak in the second half of 2008," says a January 2010 report. "Developers reacted to the fall in demand by reducing prices and lowering unit sizes, and the focus shifted from high-value housing to the more mid-income affordable segment. Any significant increase in property prices by developers, and a tightening monetary policy, could have an adverse impact on future demand. With some recent launches already indicating an increase in residential prices, there is a risk that volumes may moderate if prices continue to appreciate." The commercial segment, says Fitch, continues to remain under pressure.
The sizzle is evident elsewhere. Nearly 20 real estate companies have lined up initial public offers (IPOs) totaling more than $6 billion. Some have already gone through and done remarkably well. During the boom of 2007, there were nine real estate IPOs. Today, only one of them has shares that trade above their offer price. Even if the homeowner has been a winner, investors in real estate stocks and speculators in property have been clear losers.

Pvt Banks to Offer Tax-Free Core Bonds

India’s private banks and non-banking finance companies (NBFCs) appear set to join a list of select stateowned firms which will be allowed to offer tax-free bonds to investors, as the government seeks to broaden its avenues to raise long-term funds to build more roads, ports and power plants. The country will need over a trillion dollars over the Twelfth Plan period (2012-17 ) to improve its infrastructure.

Finance minister Pranab Mukherjee said that given the constraints in financing key projects, the government has decided to open up the window for issuing tax-free infrastructure bonds to private firms also. So far, only state-owned companies were allowed to issue such bonds.

In this year’s Budget, Mr Mukherjee has proposed that investors could put money in tax-free infrastructure bonds over and above the ceiling of Rs 1 lakh for specific investments such as in the public provident fund and equity-linked savings schemes. Investors who park funds in the proposed infrastructure bonds will get a tax break of Rs 20,000 annually. However, the bonds are expected to have a long tenure in excess of 10 years.

Private sector banks and NBFCs, particularly those providing finance to infrastructure sector, may be among the beneficiaries of the latest move, a finance ministry official who did not wish to be named told ET. The Indian central bank, or the RBI, recently introduced a new category of NBFCs — ‘Infrastructure Finance Companies (IFCs)’ which will be largely lending to the infrastructure sector. These specialised NBFCs are tipped to be the first off the block in this bond issuance. The cost of funds raised through infrastructure bonds is low, as the rate of interest offered is low, but the effective return to investors is high because of the tax benefits.

A number of governmentowned entities have issued tax-free bonds at 7.5%. If a private sector entity floats such bonds, the cost could work out to 8-9 % which is still lower than raising money from banks at close to 11%,” said Vishwas Udgirkar, executive director at consulting firm PricewaterhouseCoopers. In the early half of the decade, infrastructure bonds were a hit with investors, but changes in laws in Budget 2005-06 made them less attractive and practically killed the retail market for such bonds which was worth Rs 15,000-20 ,000 crore then. In a way, Mr Mukherjee appears to be reversing the policy pursued during the time of his predecessor, P Chidambaram, when tax-free bonds were discouraged.

Institutions such as the state owned Rural Electrification Corporation were regular issuers, earlier managing to raise funds at 6% rate. Only institutions like the government-backed IFCL now issue tax-free bonds that are picked up by institutional investors. The Budget announcement was in keeping with the demand of banks that sought access to such bonds to lend to the infrastructure sector. Infrastructure projects, typically, need debt for 15-20 years, but banks do not have access to long-term funds, as the deposits they raise are of shorter duration.

Banks can raise five-year deposits that are eligible for tax deduction . The benefit will be available to taxpayers after the passage of the finance bill and subsequent notification of the provision by the finance ministry. The move to allow private players to issue infrastructure bonds will also help in the development of a long-term bond market that now lacks both depth and liquidity. However, experts said this may just be the first step, and more measures would be required to generate retail interest.

“Infrastructure sector is stretched for capital and this move will open one more big avenue for borrowers to raise fund from retail . To create appetite for such bonds and deepen the market, these bonds could be sliced into two categories based on their level of risk. One category could be to raise funds to finance new projects and other one by securitising cash flows from existing infra projects which will be more secure,” said Jai Mavani, head, real estate and construction, KPMG. Deepening of the bond market will require more participation from pension funds, said experts, something which the finance minister did not lose sight of on Tuesday.

India to Unveil Single FDI Policy for Financial, Banking Sectors

India will unveil a single policy for foreign direct investment, including in sectors such as financial services, insurance and banking by March 31, Commerce and Industry Minister Anand Sharma has disclosed. After 3 days of discussions with senior administration officials, Sharma acknowledged that “it’s true that we were slow off the block when we started the process of economic reforms and liberalization,” but asserted in the past few years, “it would be appreciated that India has moved much faster.”
“India works on a very small negative list and the FDI which comes into India - the majority of the sectors - are in the automatic route,” he said. Sharma argued that for all of the criticism and whining, “When you look at the pace at which some of these sectors - financial services, insurance and banking - have been opened, then India has done far better than many of the countries, including in Europe and here, in these sectors.” He pointed out that “you have more US bank branches in India. You have more British bank branches in India, or for what matter, of the other countries, and there are partnerships of the major insurance companies with the premier insurance companies in India.”
“So, it is, I’d say, an incremental movement. Whatever decisions India has taken have been after careful consideration and evolutionary by building a consensus and these policy decisions are enduring ones.” Sharma said however that come March 31, there would be a crystallization of certain steps his ministry had initiated to open out to more flows of FDI with more relaxed limits that would be attractive to investors. “Our last FDI policy on the upper limit of FDI in these sectors, which are not in the automatic mode, where the Foreign Investment Promotion Board approval was required since 1996 was Rs 600 crore (Rs 6 billion). Now, we have through a cabinet decision on the initiative of my ministry, doubled the cap from Rs 600 crore to Rs 1,200 crore (Rs 12 billion), and what is even more significant was that earlier, Rs 600 crore used to be the cost of the project, but now it is not the cost of the project but net FDI inflows.”
Sharma also said that “we will also in the next few days come out with a single FDI policy document,” and pointed out that “when we started the opening up of the Indian economy and inviting FDI, all policy decisions were communicated through what we call the press notes and every year had its series of press notes.” “We had 177 press notes detailing the FDI policy. It was clear that we needed greater clarity, predictability and a policy document, which is easy to comprehend. We had started this process - a draft was put out in the last week of December 2009 for stakeholders consultations inviting responses, for inputs from industry, globally from investors throughout the world and by the stakeholders in India, the chambers of commerce and industry.”
Sharma said that this consultative process was now completed and on March 31, “we will come out with a single FDI policy document, which has subsumed all 177 press notes.” He said that in order to make this operational, “We have also set up - with government and industry in partnership - through a cabinet decision, an entity, a non-profit company called Invest India and FICCI is the partner with the Indian government and we also intend to give some equity at the appropriate time to all the states of the Indian union to bring them on board.” Sharma said that “we are in the process of rationalizing and bringing a greater degree of uniformity when it comes to various mandated approvals for investors.”

We hope to disburse Rs 95 cr in housing loans: Jamshed Daboo

22 Mar 2010, 0122 hrs IST, Sutanuka Ghosal, ET Bureau

TATA Sons subsidiary Tata Capital (TCL), which is a non-banking finance company registered with RBI, was floated in 2007. It caters to the diverse need of retail, corporate and institutional customers, directly or indirectly, through its subsidiaries across various areas such as consumer finance and advisory business, corporate finance, which includes commercial and infrastructure finance, securities business, investment banking and private equity. ET caught up with Jamshed Daboo, TCL’s head (consumer finance and advisory), to get a fix on the company’s future plans. Excerpts: 

TCL has floated a 100% subsidiary Tata Capital Housing Finance in October 2008 for providing home loans. How did the company perform in 2009-10, given that the real estate sector was hit hard by the economic downturn? 

Though the housing finance company was floated in October 2008, the approval from National Housing Bank came in April 2009. It’s a young company and commenced business from June 2009. Despite the economic downturn, we are hopeful of disbursing Rs 95 crore of housing loans in FY10. We believe a good beginning has been made. The real estate sector has started looking up and we are hopeful FY11 will be much better. 

What new initiatives can we expect from Tata Housing Finance to grow its footprint with the market looking up? 

We are in the process of tying up with real estate promoters of repute for a financing pact. We are also looking to provide project loans to builders. 

However, we will first evaluate the builder’s profile and his projects before providing loan support. We are also leveraging the Tata Group’s ecosystem to enhance our housing loans portfolio. We will finance both residential and commercial projects. The retail sector has started looking up and we are hopeful a lot of activities will happen in the commercial sector. We are reasonably competitive in the interest rate front. However, we do not believe in the teaser rates that some of the banks and housing finance companies offer. 

Do you plan to address NRIs who are keen to buy properties in India? 

I would like to reiterate that Tata Housing Finance is a new company, and we are yet to expand in the overseas markets in a big way. 

We have just opened offices in Singapore and London to address the Indian diaspora there. As we go ahead, we are hopeful of expanding our global footprint. 

Are you keen to buy retail assets of other finance companies? 

No, we have no plans to buy retail assets of other finance companies. We believe in growing our business ourselves and establish our own brand in the market. Our focus is to create a strong customer base for TCL. However, we do some amount of takeover financing. TCL’s plan is to be present in 65 plus locations with 100 branches in FY11. Apart from being in the retail finance sector, we also provide investment advisory services. 

The automobile sector has shown a significant spurt in the last couple of months. How has your auto loan segment grown in the current fiscal? 

We do financing for all automobile companies, except Tata Motors. There is a separate company, Tata Motor Finance, which finances cars produced by Tata Motors. In FY10, we expect to disburse around Rs 741 crore on account of auto financing.

SBI is the Biggest Player in the Home Loan Sector

With the teaser rate tenure coming to an end, it is time to gather the market share earned by the different players during the reign. Of the total amount of Rs. 45000 crore lent as cheap loan, SBI seems to have gathered the biggest chunk of the pie by sanctioning a colossal 67% of the total loan amount offered during 2009. The trump card used by the banking sector this year has been the teaser home loan rates. SBI has lent a prodigious amount of Rs. 30,000 crore this year as a part of the teaser loan regime. HDFC has secured a distant second position with a total sanction of Rs. 9,000 to Rs. 9,600 crore under the home loan segment.

Teaser loans from other banks however did not receive such good response. While Bank of India could sanction only Rs. 289 crore in a time frame of seven months, Punjab National Bank, IDBI Bank and Union Bank disbursed nearly Rs. 1,050 crore, Rs. 1,500 crore and Rs. 1,600 crore respectively over a time span of six months. Many banks had stopped the teaser rate regime after the RBI announced a hike in the cash reserve ratio by 75 basis points. Despite the varied response received by various banks on sanctions, all banks seem to be happy by the results of teaser rates. Manju Srivatsa, President - Retail Banking, Axis Bank, says, “From what we had been doing before we launched fixed rate scheme, we were able to do 40% more sanctions and 35% more number of loans which is a good number.”

Banks Seek Clarification from RBI on New Interest Rate System

Commercial banks are concerned over the Reserve Bank’s new interest rate system under which lending rates are to be linked to a base rate. They are seeking clarifications in an attempt to de-link home loans from the plan. This is because the expected base rate of around 8.5 to 9.5 per cent could lead to home loans being offered at 10 per cent or more. At present, home loans are available at 8.5 per cent for start-up customers at “teaser” rates offered by some banks.

Bankers say home loan rates must be kept at affordable levels for consumers. “Though most concerns over the implementation of the new system have been addressed by the Reserve Bank of India, certain more clarifications are awaited,” the chairman of a public sector bank told Hindustan Times. Bankers say “teaser” rates to lure customers should be discontinued, but add that lending rates cannot be unreasonable either. “Affordable housing is an important issue and we are yet to get clarification from the central bank if home loans would also be linked to the base rate,” said M S Sundara Rajan, chairman and managing director, Indian Bank.

The base rate system, due to be implemented from July 1, would replace the current practice of benchmark prime lending rate (BPLR) system. Nearly 72 per cent of all loans are currently priced below the BPLR. The new rules, aiming for transparency, forbid loans priced below the base rate. According to the draft of RBI guidelines, the actual rate a borrower will pay would involve the base rate and additional charges linked to costs, tenure and the risk premium specific to a borrower. The current BPLR is between 11.5 per cent and 12.5 per cent.

NPA Rises: Banks to be Cautious in Extending Loans to Real Estate, Retail

Banks’ non-performing assets have shot up nearly 30% at the end of calendar 2009 from a year ago due to stress in many sectors and farm loan waiver, indicating sharply lower profits for banks and possibility of curbs on exposure to sectors that have contributed to the bad assets. In a reply to the Rajya Sabha, the government said the overall NPAs have increased to Rs 80,023 crore at the end of December 2009 from Rs 61,647crore at the end of December 2008, an increase of over 30%. “Banks will be more cautious towards lending to sectors such as real estate, exports and even retail loans,” says a senior banker with a private bank. A number of private banks have already curtailed their retail lending, specially personal loans.

A recent report by Fitch ratings on ‘banks’ restructuring loan portfolio’ pointed that restructured bank loans worth Rs 30,675 crore may turn bad in 2010-11 and further push up banks’ gross non-performing assets (NPAs) on an average by one percentage point. State-owned banks, however, feel that the rising NPAs will not impact their profitability and that NPAs are minuscule as compared to the total advances. “If you look at our figures, the gross NPAs are at 1.8% of our total advances. Besides, all banks have been making provisions for these loans, which have been reflected in third quarterly results. There will be some caution but it’s not over-exercised,” said CGM Punjab National Bank, RIS Sidhu. The bank reported a flat 1% increase in the net profit to Rs 1011.31 crore for the third quarter of this financial year.

Country’s largest lender, State Bank of India (SBI) also feels that increase in NPAs would not result in lending curbs. “There are no indications that loans to a particular sector has totally gone bad. Every sector has reported bad assets and there seems no reason to stop lending to any particular sector,” said chief financial officer SBI, SS Ranjan. Incidentally, the gross NPAs to gross advances for the public sector banks has also shown an increase of 0.27% as compared with last year. In a move that could put more pressure on PSBs, the government has allowed an extension for loan repayments to large farmers under the Agricultural Debt Waiver and Debt Relief Scheme. The total amount under the one time settlement (OTS) for large farmers is estimated at Rs 10,000 crore.

NHB Brings In Strategic Partner

National Housing Bank (NHB) has roped in another foreign partner other than Asian Development Bank (ADB) and International Finance Corporation (IFC) for its mortgage guarantee company, which is expected to commence operation by June. The name of the partner is not disclosed yet. Initially, NHB was supposed to hold 26% and ADB and IFC were to hold 13% stake each in the mortgage guarantee company. (Hindu Business Line)