Thursday, September 06, 2007

India's subprime crisis

Business Standard reports on the drop in the disbursement of housing/consumer loans

interesting snippet here. The banks have lent just 15% of last year's bookings with a loan/deposit ratio of 8%. If this continues the banks will go in the red soon and start posting losses. How else can they afford to pay out 8% deposit rates on 92% of deposits, when they are only loaning out 8% of loans at 12.5%. A simple shopkeeper will tell you this scheme doesn't work.

This shows that the Indian loan consumer is either
1. price sensitive to high interest rates
2. priced out of the housing market due to sentiment of overinflated prices
3. priced out due to lack of ability to pay EMI
4. All the above.

The only way the consumer will come back to the loan and housing market is the drop in prices, given that loans rates will not go back to previous levels. There is no other way.

With interest rates jumping frm 7.5% to 12.5%, its not a 5% rise in EMI, it is a 66% rise in EMI. so a 20k monthly payment for 20year, 20Lakh loan suddenly becomes 32k. Thanks to the magic of compounding, consumer pays 76.8L for a 20L loan instead of 48L, leading to a loss of 28L. This is the magic of adjustable rate mortages (ARM) also called floating rate loans in India. I think many buyers of expensive properties over 40L(now 1.5crore payment) will not be able to make these payments. This is India's subprime.

Since April, banks have lent only Rs 9,132 crore (Rs 91.32 billion) compared with Rs 66,950 crore (Rs 669.50 billion) over the same period last year. On the other hand, banks had raised Rs 1,34,828 crore (Rs 1,348.28 billion) of deposits till August 17, 2007.

SBI may lower home, retail loan rates

BS Reporter in Mumbai | September 05, 2007 07:41 IST

State Bank of India [Get Quote] (SBI), the country's largest lender, is likely to reduce interest rates on home loans and other retail loans by next week, to coincide with the start of the festive season. The bank's Maharashtra and Goa circle is already offering home and auto loans at 50 basis points lower than the effective rates for new borrowers.

"We would look at reviewing lending rates when the festive season begins. A decision would be made in the next one week," said a senior SBI official.

SBI offers floating rate home loans at an interest rate of 10.75-11.25 per cent. For a fixed rate home loan for up to 10 years, the bank charges an interest rate of 12.75 per cent. The floating rate for auto loans is at 12-12.5 per cent. As part of the promotional offer in Maharashtra, the bank has waived half of the processing charge and is also offering a higher loan to value ratio for new borrowers, which means borrowers could get loans higher than the normal 80-85 per cent of the property cost.

Last week, Bank of Baroda [Get Quote], lowered home loan rates for new borrowers in the hope that it would generate some demand. BoB reduced interest rates on home loans by up to 50 basis points to 10-11.50 per cent.

A BoB official had said "The bank has to survive in a market which is highly competitive as the home loan demand is elastic. After a series of hikes in 2006-07, the home loan demand has shown moderation. The rate cut may help to get better response."

A slump in demand for loans, much sharper for retail loans, has made bankers worried as the impact of subdued interest income on year-end profits is staring at them. Banks had raised their prime lending rates (PLRs) by 250-300 basis points during the last one year. The PLRs of the five largest banks have increased to 12.75-15.75 per cent from 10.25-12.75 per cent a year earlier.

"Banks will have to look at reducing lending rates (for new borrowers) if credit does not pick up till the end of August. We are already five months into the year and advances are more or less flat, while banks have mobilised huge deposits," said another SBI official.

ICICI Bank [Get Quote] has already factored in a sharply lower growth in retail loans. Managing Director & CEO K V Kamath recently said the bank would now be talking of a low double-digit growth of 10-15 per cent in retail loans in 2007-08, down from earlier estimates of 25-30 per cent. The bank had seen over 40 per cent growth in retail loans in the past few years.

A senior official from Punjab National Bank [Get Quote] said, "Our rates are already competitive but nothing (lowering of lending rates) can be ruled out. We expect the demand to pick up towards the end of September and early October."

Since April, banks have lent only Rs 9,132 crore (Rs 91.32 billion) compared with Rs 66,950 crore (Rs 669.50 billion) over the same period last year. On the other hand, banks had raised Rs 1,34,828 crore (Rs 1,348.28 billion) of deposits till August 17, 2007.

In the first quarter of 2007-08, SBI added Rs 2,012 crore (Rs 20.12 billion) of advances. The bank's lending portfolio stood at Rs 3,44,087 crore (Rs 3,440.87 billion) at the end of the June. "While, domestic advances fell by around Rs 2,000 crore (Rs 20 billion), the international loan book of SBI grew by close to Rs 4000 crore (Rs 40 billion). The bank's housing advances stood at Rs 39,241 crore (Rs 392.41 billion), constituting 52.22 per cent of its retail advances.

1 comment:

Anonymous said...

Sub prime crisis exists in india.
Most of the cars, housings are on mortgage basis only. When the borrower is in trouble due to loss of job or contraction in his business, he is unable to pay it.Notorious banks like ICICI, CITI send goondas to recover. Assuming a condition that the borrower says "take away the car. I cannot pay", imagine a condition the bank will have to arrange for a huge park place for parking the seized cars. Thus the borrower heaves a sigh of relief. Now where will the bank find a place in metros for the parking? With huge availability of variety of cars, a pre used car buyer will have option to buy anything and the bank in a bid to avoid further crowding of cars, may be agreeable for even a distress price. There is no loss for the banks since already sucked the blood of the borrowers under the supervision and stewardship of RBI which dictates the interest rates. What they earned as huge profits in the past by squeezing the borrowers, they pay the price