When Sampath was looking around for a home loan in 1997, the bank charged him a fixed interest of 13 percent a year and an upfront fee. He was also asked to arrange for two guarantors, provide five years’ income tax returns, bank statements for the past three years and wait for a month to receive an approval from the bank that he had visited a dozen times to complete the paper work.

Ten years on, he is reliving this experience. But this time it is for his second home. After a five-year boom (which Sampat evidently missed), banks are turning cautious on home loans, particularly if it is in the premium segment — loans of Rs 20 lakh and above, or a loan for a second home.

Defaults in the overseas markets and constant reminders from policy makers and the banking regulator of a bubble in the property market have made them more careful.

Head of ratings at Crisil, Krishnan Sitaraman says, “The rise in the property prices, coupled with rise in the interest rates which have translated into higher EMIs, has made it difficult for borrowers to service their loans over the last year.” Crisil estimates bad loan to be around 2.5 percent in home loan segment. The Asset Reconstruction Company of India (ARCIL), which makes money by buying and trading in bad loans, is sensing opportunity in the home loan market. “We expect bad loans to grow in this segment and we are gearing ourselves to acquire such loans from banks,” said MD and CEO of Arcil S Khasnobis.

Even a nominal 3 percent default will be significant given banks’ total home loan portfolio of Rs 2,18,000 crore by December 2006. A 3 percent default would be a little more than Rs 6500 crore.

That banks are no longer wooing customers to take home loans is clear from the numbers. Once considered as the most aggressive home loan provider, ICICI Bank saw a 38 percent rise in home loan as against 45 percent last year, while the country’s largest bank State Bank of India saw 18 percent rise as against 28 percent in the previous year. It is the same story with other large lenders like Canara Bank, Punjab National Bank and Union Bank of India.

Like most assets, banks face the three customary risks in home loans — interest rate risk, liquidity and default risk.

“We have a centralised unit for all retail loans. This has reduced frauds and defaults,” said Indian Bank chairman KC Chakrabarty. “Besides, we don’t encourage loans which are being referred by builders who do not bank with us,” he said. Once some builders referred a list of borrows to the bank claiming that the flats have been sold to them. In reality, the loan was actually used by the builder who continues to service the loan. The builder gets access to cheap working capital and sells the same flat on the back of a duplicate mortgage document.

Others like Punjab National Bank last week withdrew all powers from branches and zonal offices in giving a discount on the home loan rate. Earlier a PNB branch manager could charge 25 to 50 basis points lower than the card rate to existing customers and PSU employees. The move again reflects efforts by the bank to protect its books.
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