Vidyalaxmi & Preeti R Iyer
The Economic Times

Tighter liquidity conditions are forcing banks to shift the focus from secured home loans to unsecured loans such as credit cards and other personal loans, which generate far higher returns than mortgages.

Industry estimates show that acquisition of new customers for home loans has fallen by almost 25-30 percent since January. But bankers expect unsecured personal loans to continue to show strong growth this year. The slowdown in home loan customer acquisition is attributed to banks no longer pushing home loans aggressively.

This comes on the back of a sharp rise in interest rates as well as property prices, which is discouraging individuals from investing in real estate. “There are two reasons. First, there should be enough liquidity available to banks at an affordable price. Currently, there is a strain on liquidity in the banking system. So banks prefer to park funds on unsecured loan portfolios such as personal loans, earning higher margins,” says Murali Natrajan, Standard Chartered Bank’s head, consumer banking, India and Nepal.

“In case of mortgage loans, the margins are much lower. Interest rates have firmed up by 200-250 basis points over the past 3-4 months. This has naturally reduced the demand for housing loans from the customers’ side. This has also affected loan disbursements,” he adds.

Between December 2006 and March 2007, the Reserve Bank of India (RBI) hiked the cash reserve ratio thrice, thus forcing banks to park more funds in the form of cash with the central bank. This also saw several banks hiking their prime lending rates by 50-75 basis points.

Bankers estimate that the home loan market would grow about 20 percent this year, compared to previous year’s 30 percent. On the other hand, the unsecured loans portfolio is expected to grow at over 30 percent, compared to 20-25 percent earlier. In fact, banks anticipate even higher growth rates in the unsecured loan portfolios, especially after September, with the beginning of the festive season.

Home loan experts point out that banks take a good look at the financial profile of customers before selling the home loan product. There is a growing concern among banks/housing finance companies (HFCs) that a customer may find it difficult to cope with the rise in EMIs, especially on long-tenure loans.

A senior official with a multinational bank said, “Banks are watching every new customer who applies for a housing loan. A sustained rise in EMIs has caused a strain in the borrowers’ pocket. So there is a concern that customers may not cope with the rising EMIs and hence default on their loan. EMIs have almost gone up by 30-35 percent. But the income levels, on an average, increased by 20 percent. Over a period of time, the difference of 10-15 percent weighs on the consumer’s pocket. So, we have been increasingly lending to HNIs or our existing customers for their second homes.”
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