Bad Debt: New Act brings cheer to Indian home loan lenders

The move to bring housing finance companies under the purview of the Securitisation Act will certainly bring cheer to the lenders. Empowered to foreclose on defaulters and seize their properties, without having to go through time consuming court procedures will allow Indian lenders to get the borrowers in line.

The news of empowering the lenders was not surprising since the proposal had been in the pipeline for some time.

What did surprise me was that a sizeable number of defaulters from the southern states of India were Non Resident Indians. According to statistics available most of the NRI borrowers, went into the default mode over the past nine months. Analysts are trying to figure out why as early as October 2002 NRIs began to default on their equated monthly installments (EMI).

Exchange rate

Analysts are of the opinion that had the present strengthening of the Indian rupee in relation to the American dollar and therefore also the UAE Dirham, been a probable cause, the defaults would have started early this year.

The fact that the defaults in large numbers began in October/November 2002, therefore, could not be attributed to the prevailing volatile exchange rates. If the latter was the cause then it has to be presumed that at least some NRIs were better informed than most financial analysts and bankers.

This analysis of defaults on home loans is based on a sample survey and more detailed data is presently being compiled. Sources say that it is possible, as far as the NRIs are concerned that they had begun to move their liquid funds into other investments, secure in the knowledge that a few EMI defaults would not trigger any drastic action apart from default notices being received and penalties being imposed.

Once data on both domestic (resident Indians) and NRI home loan defaulters is compiled and a thorough analysis is done the reasons for NRI default may become clearer.

Mortgage foreclosures and seizure of properties is not a new phenomenon. In the West, especially in Europe and the United States the laws have been very clear on the issue and the borrowers know that. In India the concept of mortgage entered the financial arena only over the past two decades and under a new nomenclature, namely, home loans.

Adding impetus to the home loan sector in relation to both lenders and borrowers is the low interest rate regime. The latter being the catalyst, which has prompted even those who barely three years ago, would have thought twice about buying a house with a home loan, to opt for one now. As far as the lenders are concerned they want to make their money 'work' and therefore have opened the floodgates.

Economists and a section of bankers in India have been warning for the past couple of years that indiscriminate lending especially in the home loan sector could lead to finance companies showing larger than normal Non Performing Assets (NPAs) on their books.

They were correct in their assumption and the ensuing warnings. Fortunately the Indian government and its regulatory authorities, as far as the lenders are concerned have accepted their advice. And hence the move to bring housing finance companies within the ambit of the Securitisation Act.

Conservative

According to reports, today in India, apart from the traditional and considered to be very conservative home loan lenders like the Housing Finance Development Corporation (HDFC), there are nearly 400 companies which have jumped on to the bandwagon.

Among these are quite a few non-banking financial institutions (NBFCs) too. If the latter were also given the cover of the Securitisation Act then lenders would be able to sleep better and perhaps even keep speculators at bay.

Under the new regime defaulters would not be able to move the courts for a 'stay' on seizure of their property. All that the lender will have to do is inform the police and then proceed with physically taking charge of the asset. It is as simple is that.

As far as the NRIs are concerned it would be wise for the home loan defaulters on India based properties to clear their dues as fast as possible and then stick to their payment schedule.

NRIs should remember that unlike resident Indians they do not have the luxury of being on the spot and therefore take corrective measures speedily. That is if they are serious about retaining that 'dream house'.