Loan sops: Has Govt put PSBs to Risk?

By Vijay Marke

Will the governmentbacked housing loan package push PSU banks towards an uncharted territory? Some quick back-of-theenvelope calculations bring out the unprofitable and the dark side of Monday’s government-backed home loan package.

In a situation where housing prices start falling over the next one-two years, and lenders stick to the current rules governing loans to home buyers, these loans could become headache for the banks, the government and borrowers under the new scheme, experts said.

Under the package, PSU banks will give loans of up to Rs 5 lakh at 8.5% per annum and for loans between Rs 5 lakh and Rs 20 lakh at 9.25%. The rates are fixed for five years, meaning it could change, and even go up, at the end of the five-year term. The borrowers are required to pay a 10% margin for the below Rs 5 lakh category and 15% for the higher category. Meaning, for a loan of Rs 20 lakh, the home buyer will have to contribute Rs 3 lakh and the balance will be financed by the bank.

While the government is backing this package to revive the housing sector, it is also talking tough to home builders, saying home prices are beyond realistic levels and real estate developers should cut prices. If the rollout of the package and the cut in home prices take place simultaneously, that could lead to uncomfortable situation for either the banks-government combine or the borrowers.

Consider this: Say an individual buys a home for Rs 20 lakh with a loan from a PSU bank under this package. At 15% margin, the borrower will have to bring in Rs 3 lakh and the bank will finance Rs 17 lakh. The house which the lender buys will be mortgaged to the bank against the loan.

Now suppose home prices in general fall by 20% in the next one year. Then the market value of this home would be Rs 16 lakh, that is down by 20% of the original value of Rs 20 lakh. The buyer has taken a loan of Rs 17 lakh and in the first year of re-payment of the loan, say about Rs 50,000 of the principal amount has been paid to the bank, other than the interest which together form the EMI. At the end of year one, the loan outstanding is Rs 16.50 lakh while the value of assets mortgaged, the house, is Rs 16 lakh. This would lead to a situation of insufficient security, a gap of Rs 50,000.

Under the current lending rules, in case of insufficient security, the bank could ask the borrower to make up for the gap. In this case the home owner would have to arrange for an additional Rs 50,000, even after paying his instalments regularly. The rule is if this money is not paid to the lender, the house could be foreclosed.

Even if the borrower arranges to fill the gap, it could be a severe burden on him, pointed out a mortgage market veteran. And in the event of a foreclosure, if the bank wants to dispose of the property, under normal circumstances would fetch about 20-25% less than the market price. So the bank would also take a hit of another Rs 3.2 lakh to Rs 4 lakh on its books under this scheme.

“This is a completely loss-making deal for PSU banks. With cost of funds over 10% now, PSU banks are venturing into a risky region,’’ said a top official at a private sector bank.