Late Extra: Indian housing loan sector in for shakeout

The shakeout in the Indian home loan market has begun. I had not expected that it would begin to show signs of a burn-out so soon. But just 10 months into the current year, when interest rates began sliding and home loan lenders began undercutting each other to grab a bigger slice of the market, the writing has begun to appear on the wall.

It appears the end of the borrowers' dream is going to be rewritten letter by letter. But it may take a while for the dream to turn into a nightmare for the still euphoric borrowers.

In the past fortnight three significant events did give an inkling that something was about to give in the home loan sector. The first was the speculation that post November 3, when the Reserve Bank of India is scheduled to spell out its credit policy, interest rates may again be readjusted downward. Home loan rates are expected to follow and flow with the slide.

The second was that cautionary note again announced by the RBI to home loan lenders not to over-extend themselves. The RBI may come out with guidelines asking lenders to disclose the cost of funds and operating margins. The Indian central bank is worried that "predatory pricing" would impact adversely on the country's financial markets.

SBI statement

The latest is the announcement by A.K. Puwar, chairman of the State Bank of India (SBI), that his bank will wind up its housing finance arm. It is the finality of the SBI chairman's statement which stunned the markets. "SBI Home Finance didn't work well. We are winding it up."

The general expectation was that the small players in the home loan sector, including some non-banking financial companies (NBFCs), would buckle under first. Financial writers and analysts had begun to issue cautionary warnings that the lenders were finding it hard to keep pace with individual entities announcing lower and lower rates.

The RBI was expected to take some steps to intervene and usher in some rules to restore so-called sanity in the market segment.

It is possible that State Bank of India is privy to what the RBI is about to usher in and has decided to opt out. The SBI's chairman has admitted that SBI was buckling under the burden of large non-performing assets (NPAs) of its home finance arm.

Speculation is rife that something very dramatic is about to happen. It is intriguing that the SBI, which was until now very active in the sector with a portfolio of nearly Rs15 billion, is opting out now.

Analysts say the SBI's NPA burden could have been rationalised with the Securitisation Act in place. Conclusion: the real reason for the SBI decision to close down its home finance section may lie somewhere else.

The other factor, which is under scrutiny, is that if the home loan rates are lowered still further, either individually or collectively by the lenders, will the move lead to the start of 'churning' operations?

Financial institutions and companies have already begun to offer borrowers 'master loans' with which they can supposedly wipe out loans taken in the past at much higher rates and enter into new agreements at lower ones.

Churning at the best of times is not desirable from the borrowers' perspective. Borrowers should be aware that their present lenders may have a pre-payment penalty in place which could be as high as two per cent and, secondly, when borrowing afresh, the cost of the new documentation fee should be assessed. If even after paying those, a fresh loan is financially viable, then the borrower may benefit.

The writer is an India-based journalist