Wednesday, June 06, 2007

Gone with the loan

Hindu reports on the high cost of loans

Banks run after you, giving colourful reasons for you to take their home loans. You oblige. Then they hike EMI at will. You wish you hadn’t obliged. But then it’s too late, writes M.L. MELLY MAITREYI

These are trying times for home loan consumers. The frequent increase in the interest rates on the loans, which saw a jump of 4 to 5 per cent in the last couple of years, had the domestic budgets of borrowers going for a toss.

And what’s more, the borrower is caught unawares by the quantum jump in the Equated Monthly Instalment (EMI) which can literally plunge a middle/salaried class household into a financial crisis.

The dream of acquiring a house which materialised thanks to the competitive interest rates and pro-active approach of banks and housing finance companies not long ago, suddenly turned into a nightmare with the inflated EMI eating into the substantial part of the salary.

Narendra Kumar, who had taken a ICICI Home loan in 2004 at a floating interest rate of 7.5 per cent, now pays much more.

“During the last few years the interest had been revised several times. The tenure was increased to two years resulting in an additional burden of Rs.6 lakhs. Recently my EMI was hiked by Rs. 9,000 with no prior notice or information. And a penalty is slapped for not keeping enough balance when it is time for electronic transfer,” says an exasperated Mr. Kumar.

This is an unfair and amateurish way of dealing with the customers, he adds, wondering why banks, housing finance institutions do not explain all the implications and pitfalls of the loan agreement to the customers in the first place.

“It is not feasible to have a buffer amount to meet a sudden increase in EMI as incomes in most sectors do not match up to interest hikes,” concurs T. Ramarao who too is reeling under the impact of sudden hike in EMI by HDFC.

“Earlier, the EMI amounted to one-third of my take home pay. Now it has gone up to 60 per cent of it with the interest rate going up from 8.5 to 11 per cent. Forget about luxuries, even spending on essentials is becoming difficult,” he says.

In the 1980s, it used to be quite tedious and frustrating to get home loan sanctioned and the process was time-consuming. Now the problems begin once the loan is availed, quips another consumer.

This is particularly so with the private bankers who went aggressive in promoting home loan business with competitive interest rates.

Jayaprakash of Tata Teleservices got a loan in August last year at a floating rate of 9.25 with an EMI of Rs.13,500 for a tenure of 20 years. Now, in less than an year, the interest has gone up to about 12 per cent, EMI to Rs.15,000 and tenure to 25 years.

But the ICICI Home Loans puts the ball in the RBI court and suggested he could pay up Rs.2.5 lakhs of principal to retain the same EMI and tenure. “I did it at the cost of other important expenditure,” says Mr. Jayaprakash who is now seriously considering switching over his loan to SBI or LIC Housing.
Liquidity problem

According to SBI sources, home loans were given at competitive rates with the expectations that interest rates would not change. But with the frequent revision of interest rates, three times within one year by private banks and two times by SBI, all banks now face a fund crunch.

With the call money market rates increasing and fall in deposits, banks face liquidity problem.

With the increase in deposit interest rates, service charges had gone up and margins had come down, necessitating hike in home loan rates.

Many, taking advantage of low interest rates, had gone for a second home loan to get IT exemption. With the hike in interest rate, such plans have been shelved. Even first time home buyers have put their plans on hold, affecting the real estate market.
No choice

However, bankers say they have no choice other than increasing the EMI as the tenure cannot be increased beyond a point. Rising interest rates have also meant eligibility criteria going down by as much as 21 per cent in the case of ICICI Bank alone, the biggest mortgage player in the market.

The Reserve Bank is reportedly working out modalities to bring some relief to home loan borrowers by stating that revision in interest rates should not apply to loans below Rs. 20 lakhs.

But 90 per cent of home loans are below that mark, making it difficult for banks even to consider the proposal.

Little wonder then that most banks expect growth in the home loan business to be not more than 25 per cent this year, the lowest in five years.

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