>Home loans – Demand returning, pricing pressures to continue

Event
■ We had discussions with banks to get an update on the home loan market in India.

Impact
■ Pressure on pricing to continue in the near term. Banks have been extending their discounted home loan rate schemes, basing their decision on marginal cost. While Axis Bank has entered with its own discounted rate scheme for new home loans, PNB and SBI have extended the time period for which their low rate scheme will be applicable. With loan growth in other segments remaining moderate, at best, and demand only now returning, we do not see banks being in a hurry to raise home loan rates until they see definite signs of overall interest rates in the system hardening (likely to happen towards the latter part of FY10 or early FY11).

■ Demand coming back. For the home loan market, volume seems to be the name of the game at present, with emphasis on expanding book rather than focussing on margins. The combination of lower property prices, attractive interest rates and aggressive promotions does seem to be working, and banks are seeing a progressive pickup in disbursals. With rates likely to remain soft, we expect growth to continue, with 2H FY10 better than 1H.

■ Asset quality has held firm. Asset quality of the home loan portfolio in general has proved remarkably resilient. Banks estimate NPLs at approximately 1% in their portfolio, a figure that has been steady through the cycle. While there may be some deterioration from these levels in view of the continued sluggishness in the economy, any significant decline may be precluded because of the following factors:

⇒ Banks have been conservative with their lending. The target base remains the salaried customer with a regular source of income. Monthly instalments are capped at 50–55% of net monthly salary. Loan-to-value is 75–80% for the new loans, with the average for the total loan portfolio significantly below that.

⇒ Banks have been proactive in handling cases of financial stress, with the preferred method being extending the tenor of the loan.

⇒ Demand for housing remains high, and the majority of borrowers are owner-users rather than pure investors. Hence, they prefer to pay the monthly instalments even in times of financial stress.

Outlook
■ Among banks in our coverage, we believe that Axis Bank, ICICI Bank and SBI should be the main beneficiaries of the revival in home loans, given their relative importance in the overall portfolio (see Figure 1 on page 2). However, the pickup in the case of ICICI Bank may be more muted, in our view, given its higher interest rates on home loans relative to peers.

To read the full report: INDIA BANKS