Friday, February 26, 2010

Ripoff by Indian banks

Passing the buck, this is what banks do. I remember asking for a fixed rate loan and the bozo's didn't even know the details of their own product. Floating rate loans are the ARM mortgages of India. Interestingly in the US, most loans are 30 year in duration. In India they are betweeen 10-20 years and if one looks at the interest payments for the loan at high interest rates, the amounts are staggering. Indian banks have suckered people into these products and soon borrowers will be paying 10-20 extra EMI's. With 50k on average, a nice 5-10L extra for the banks. If a 48 year old Chartered Accountant is running into these problems, what about lesser educated folks in the finance field

Livemint reports.

In the ocean of disagreement about India’s economic indicators—gross domestic product growth, inflation, share prices—there is an island of consensus: the direction of interest rates. “Going up” are the words on everyone’s lips. The governor of the Reserve Bank of India pithily stated: “The direction of policy is clear—we had to ease at the time of the crisis, we have to tighten now.”

While the average Indian will get indirectly affected in many ways by rising interest rates, there is one area where the impact will be direct. And severe. This is in home loans.

I asked one of my senior colleagues, Francis D’souza (name changed), about the home loan that he had taken from a respected private sector institution (Francis is a chartered accountant, all the more surprising!).

“What was the kind of home loan product that you took?” I asked.

“Well, they only had one standard product, a floating-rate loan that was priced off their PLR (prime lending rate). The choice of tenor was flexible—I took a 10-year loan, since I am already 48 years old.”

“So you got a your credit score, which resulted in a discount to their PLR, and this EMI (equated monthly instalment) was for 120 months?” I asked.

“Yes, that’s right.”

“And what happens now, if interest rates go up? How do you get to know, and what impact will it have on your EMI?”

“The loan document said that the PLR gets adjusted every quarter, and it’s apparently on their website, but frankly, I don’t get any communication on it at all. But yes, if the rates go up, I will be affected—the EMI will remain the same, but I will have to pay more than 120 instalments, maybe 130 or so, depending on many factors that I don’t understand.”

“When you took the loan, was there any discussion about this exposure? And also, did you have any alternative—say, a fixed-rate home loan—that was discussed with you?”

“No, the floating-rate loan was their only product, and no, there was no discussion about the exposure that I had to moving interest rates.” He paused, and added, laughing nervously, “Frankly, I don’t look at the statements, we just hope that we will be done in 120 months!”

Francis’ situation is similar to hundreds of thousands of Indians who have taken out floating-rate home loans over the past several years. The home mortgage business today is around Rs2 trillion, growing at 35-40% a year, according to data from the National Housing Bank. Precise data on fixed/floating mix is not available, but Adhil Shetty of tells me that “over 90% of it will be floating-rate-based. Banks don’t market fixed-rate products, and sales people are generally trained to sell floating-rate home loans”.

A detailed check of the market suggests that most banks offer only floating-rate home loans, and a few offer hybrid fixed products. There are no pure fixed- rate loans—one large public sector bank offers a fixed-rate loan for 20 years, but it resets after five years.

Many market observers have written about how India’s mortgage market is unfair to customers. But these debates have invariably been about one particular issue—that of the arbitrary and subjective nature of PLR setting by each individual bank.

However, the fixed versus floating exposure issue has received little attention. Some argue that this is because there is no demand for fixed-rate mortgages—customers invariably choose to pay a few per cent less for floating-rate loans.

But this issue cannot be dismissed as one of informed choice and caveat emptor. There are two critical aspects that need attention: One, the deeper systemic issue underlying the absence of fixed-rate home loans; and two, the issue of consumer rights and financial literacy.

Current market practice clearly proves that banks have no incentive to sell fixed-rate home loans. But they don’t do this because there is no deep long-maturity debt market in India that allows banks to offset their duration exposure. Essentially, the banking system has no way to offset the risk of long-dated assets on their balance sheet.

The solution? Pass on this risk to the customer. In essence, what a sophisticated banking industry cannot manage is now being handed off to the man on the street. There’s something wrong here. In the medium term, the answer will clearly come from a deepening capital market, one that can absorb longer dated assets such as home loans.

This brings us to the second point—while deeper markets and so on will take time, banking practice needs to change right away: to educate customers about the implications of their choices, and the extent of the exposure. EMI calculators can easily have “what-if” scenarios going out over the life of the loan.

In the meantime, my message to Francis was: “Please get in touch with your loan officer and understand your exposure. Don’t rest on the hope that ‘all is well’.”


Anonymous said...

The prices are so high that are costliest in the world. Even if we compare from US, the Per Capita Income in India is about 750 USD where a two bedroom accommodation in costing about 200000 USD and in US itself where the Per Capita income is about 50 times higher than India the same residential unit is costing about US $ 400000. Under the current circumstances the residential property prices are somewhere 20 times higher than India. Currently the builders and brokers are trying to panick the prospective buyers and it is prodent if all home buyers keep them away from any purchase till the prices come to 40% level of current prices. By that time these Real Estate Companies would be finished. That is their ultimatedestination one day.

Pl help yourself to buy a house. Pl stay away from purchase of any property for 6 - 12 month's time.

Anonymous said...

I am also waiting for the realty sector bubble to burst. I read somewhere that when all the money goes into one particular investment and that will be the time when bubble will burst. In 2008 when everyone put their money into stockmarket and it burst and so many lost more than 50% - 60% of their money. So, in case of realty it will take may be another 1 or 2 yrs to burst.

Anonymous said...

We hope to hear from Vulture more since he is back. Shailesh has been a very good contributor and maybe HB would also come back.

Anonymous said...

Let us resolve that we will not purchase any property for the next 6 - 12 months. and you will see that the bubble is burst. We should also advise everyone to do the same.


Anonymous said...

As every tangible asset in India, housing too is over priced. I cannot believe it costs THAT much to build a house/flat even allowing a decent return on for the builders efforts. Worse still is the belief that once you own a property you are rich and worth, for example, a crore. Actually your property is worthless, in so far as you are in occupation thereof, and is therefore not a disposable asset. In fact financially it is a loss!! When you consider the maintainence charges/civic taxes etc.! No one ever highlights these factors.

Anonymous said...

So long there is parallel economy in India real estate bubble will not burst because a large no of earning class serviceman, businessmen, brokers in all field, professionals including doctors, engineers,advocates, CA, etc etc are making unaccounted money.There is a big gap between their actual earnings and reported earnings. which they can only invest in gold (Upto certain limit)or benami properties.The unaccounted liquidity in real estate sector will not allow the prices to fall.

Anonymous said...

A three bedroom flat in a reasonble location in Panjim costs about 70 lacs. A better constructed flat 1 crore.
A house can cost you anything from 1 1/2 crore to 3 crores in Dona Paula,2 kilometres from the centre.
The average price of a house in England is 1 1/2 crores and a good house in London will cost you about 2 1/2 to 3 crores.
The salary of a professional person at the top of his profession in Goa is about 7 to 8 lacs per year.
The salary of a similar professional in London is about 80 lacs per annum plus high taxes and high cost of living for food etc, auto insurance etc.
How on earth can even a successful Indian expect to live in a reasonable house given these facts.
This is to say nothing about the lower middleclasses and the poor. Hello wholesale corruption!!
I hope the bubble bursts, and takes out all the corrupt realty dealers and politicians in its wake.

Anonymous said...

the land value in tirunelveli TN is unethical,unreasonable as there is no industry here but the retired persons & IT professionals were responsible for the huge hike.Middle class are unable to buy a house as it a fundamental for a family.i prey God to make burst the value not only in India but everywhere.Recession & subprime crisis must come to India .

Anonymous said...

Prices are going up like anything. A Common man cannot buy a 1 BHK Flat unless he takes a loan and pays through
out his life time. The legacy of paying the loan will be
given to his generations to come. A Sad state of affairs and the government, irrespective of which is in power is to be blamed.

Anonymous said...

Property prices are just unimaginable. The aam-aadmi is always at the receiving end. Even well paid people too are finding it extremely hard to have a 1bhk apartment which they can call their own. The bubble should burst and this time the Government should not bail out these companies. These realtors should be taught a lesson.

Anonymous said...

I will be the happiest man to laugh because i have been trying to acquire an apartment, but i could not due to price rise, it is Vijayawada town, about this town nothing great. But the prices higher than the Bombay market, black money fake money, swiss money making the increased supply of money hence price rise because supply of money is more than the products produced. Lot of currency has to be burned out, until do not expect I will buy the apartment

Anonymous said...

I feel the Biggest Bubble in the World is in Indian Real Estate Market especially the Urban Area.

An apartment or Residential Site in a dirtiest place without any proper infrastructure costs many many times more than what costs in a very posh locality (with all the infra and amenities in place) in any of the developed countries. The reason behind such high price is the prevalent of TOO MUCH OF Black Money - real estate investments are the best way to dump the tons of Black money our politicians and Govt Officers, doctors and Buisnessman have made - these guys do't pay the tax but they don't mind paying more than the true value for the property they buy. Only way to check this Real estate market as a dumbing ground for Black Money is to convert all transcations to Online akin to Our Share market. There should not be any physical holding of Propery Documents, but should be in Demat Form connected to the respective bank accounts. Purchaser should pay online and Registration charges, brokering charges should be deducted Online and should be credited to the respective Registar Office and Brokers Bank account.

Anonymous said...


Anonymous said...

In kolkata, some of the realtors are putting ads quoting anywhere between 11.50 lakh to 27 lakh for 2/3 BHK flats but actually once you go to somewhat populous area of the city the actual out of pocket cost goes up to 45lakhs and above. Even the quality of material being used are not of good quality. People consider cost and then end up owning small box apartments.

D. Sengupta

Anonymous said...

In fact it is greediness of the builders that the prices of residential complexes in suburbs are so high. They have cornered the market by forming a cartel and are not bothered if the buyers are not agreeing to their terms as they have amassed lot of unimaginable welth so far.Basically it is Govt.'s fault that they have not developed the infrastructure keeping in mind the growth of this city Mumbai. Had they vision of this and made necessary provision for speedy infrastructure development, Govt. would not have faced any problem in increasing FSI like some of the Asian Countries like Taiwan, Hong Kong, Malaysia, Dubai etc.I agree there is not scope for city to develop horizontically but it certainly develop vertically by building high rise buildings. But again the question is- What about the infrastructure? Builders lobby very well know this weakness of the Govt. and hence acting in way they like.Ultimately aam aadmi is sufferer.But who botheres for aam aadmi. Neither the Govt. not the Builders not the affualent society of our country.Further there is an established nexux amongst Govt.bureaucrats, politicians, builders, judiciary and all other Govt. agencies. How an ordinary person can come out of their cluctches? It is next to impossible and hence all talk for upliftmnent of poor or aam aadmi are meaning less and will not have any effect. Things will go on like this only and on the contrary these kind of activities will expand further as these personalities have grown so strong in their fields that they have become untouchable.They have become more powerful, resourceful and influensive in all acts of life. JAI HO.

Laxmikant Sha

Anonymous said...

My initial thoughts went out to the aam aadmi who has probably borrowed heavily against his property and would be the first to get hit when (not if) the property bubble bursts, as this would see his lifetime savings wiped off overnight and quite possibly leave him with "negative equity". My heart goes out to these people as the bubble will burst sometime since spiralling property prices cannot be sustained for an indefinite period.

On the other hand, I also know that this is one industry which is not regulated at all and where black money is allowed to thrive, not merely exist. When the bubble does burst it will, at least partly, cleanse the economy of this black money. I for one, as your caption correctly reads, will be happy to see the bubble burst. It is totally incomprehensible for a resurgent and thriving India in the twenty-first century still turning a blind eye to this scourge of black money.

Anonymous said...

The Developers have become something like Black Market Hoarder whom we saw so much in the movies of early seventies, before the villains shift to more rewarding business like Drugs and terrorism.

As because the supply side comes in trickles they keep jacking up the prices as they come closer to exhausting their stock. The Ripple effect is that land seller expectations go up and the whole economy get distorted.

The Saddest part is that even the Govt plays the game, Instead of trying to regulate the market by bringing Stocks at Correct Price Levels they are happy reducing their budgetary Gaps by selling/auctioning Land again at even higher prices thus taking the prices up even further.


Anonymous said...

The property dealers have made the life hell for the common people in Delhi NCR. They have formed a group and increase the prices like anything. See the scenario in Dwarka, Gurgaon, Rohini etc. E.g. In Dwarka they keep on increasing the prices on the basis of nothing, they ask for 80L for a 3BR house and almost 50% of it in black. I doubt even the PM of India can afford the house from his income from his salary but government is sleeping because all the MLA, MPs have their black money parked in property. Anyone listening?


Anonymous said...

Why don't consider a real estate or property exchange in India.

On a daily basis how many properties where bought / sold can be indexed like BSE Sensex...

Let us call it as Indian Real Index. At present NHBC has lauched it's Real Estate Index but based on survey.

Will it be free of speculation? Definitely no!

But speculation will be visible on a day today basis. Trends of Price corrections will be seen immediately if there is no buyers for over priced properties.

In trade there must be proper price discovery.

This happens in stock / commodity / Currency exchanges.

If a person has to sell a property he has to sell through an exchange.

Before a person wants to buy a home he can get the loan eligibility report.Then he can locate the property he wants.

Fortunately in India, loans are given on the basis of repaying capacity.

I strongly welcome the ban on tax benefits for the interest paid on housing loan EMIs. This will put an end / break to buyers greed / emotional aspects to save tax + having own house.

Credit is a sword with double edges, careful useage is the only way forward.

S Singaravelu, CFP

Anonymous said...

Property players in Mumbai needs regulation. This is the perfect time for RBI/Govt. to intervene and regulate property prices in Mumbai. All the buildings can be classified in 5 to 6 categories based on their ameneties. eg. basic building category A, building with Gym, Playground -- category B, Building with Gym, Playground, swimmingpool, tennis court -- category C etc... The prices can then be put per sq.ft. carpet area for each category and each location identified. eg. category A in goregaon = Rs. 3000 psf, category A in Andheri = Rs. 3400 psf and so on.... It is high time that government should intervene for the common man... MAHADA cannot even fulfill 1 % of the housing needs in Mumbai. So regulation is a must and should be implemented immediately throughout Mumbai. This would break the builder/investor nexus to hoard up prices to unaffordable levels for the genuine buyer.

Manish Jain

Anonymous said...

I do not see the Residential Real Estate prices rising at all! See DLF, Omaxe, L&T, Olympia and other properties in & around Chennai and it is clear that prices are stagnating because demand is poor. Everyone is waiting for the builders to complete the project fully so that they could even buy at higher prices but feel safe to get possession immediately. You never know when even the best in business will be able to complete the projects!

Take you chequebook and sit with builders and you really get to know the pulse on pricing. My take on prices rising in Residentail sector could possibly be end of 2010 if not later.

The Software sector buyers, on whom most of demand projections are based, are seeing first signs of business coming back, hiring going up etc but it is still too early to predict anything, notwithstanding what Obama administration has recently said and what our hardcore Software pundits would say othetwise.

Wait and watch seems to be the buzzword.

S Ramgopal

Anonymous said...

KPSingh and Parekh are right that prices are so high that some builders are going to bust. Prices because of nexus have risen unrealistically and rapidaly. There are very transactions taking place. Claim of 5000 Flats sold in Navi Mumbai exhibition of Jan 2010 are not supported by those many sale registration data in CIDCO Office.Its greed of Builders. Sale and purchase is being done by investors. They too are stuck up and waiting for real high profit booking, without realizing as to who is there to buy. NRI lot are not coming forward to buy at this jacked price. Even Delhi property exhibition few months back was not a success more so with NRI'S. Delhi real state is down and stable. However, Mumbai prices have suddenly jumped and crossed even that of 2007-08, in certain areas like Nerul in Mumbai.If a bubble has been built up by vested interests, its bound to burst as has happened in past. This price rise is not sustainable. If we do not listen to warnings of these two Gentlemen then investors will suffer at their own peril.

Anonymous said...

SEBI Chairman Bhave hit all the right notes:


Anonymous said...

I would like to contest Sanjay Negi's argument that there is a scarcity of houses. Just for an example - Noida. As per the projects in action, in the next 3 years there will be a supply of no less than 60 thousands apartments in Noida. And I am not including Greater Noida here. Still the prices are obnoxious. No builder is offering for less than 3200/sq.ft. Moreover, all builders are charging at least 33% loading. Even with a FSI of 2.5, they are making a tremendous profit.
It is more of a cartel - every builder is offering nearly the same thing at the same rate. There is no competitive element. It is like they believe that the buyer has no other option but to buy from them.

Rohit Gupta

Anonymous said...

The way the residential buidling prices are rising, it is going to be difficult for a majority of people to buy the same. It is mainly the business people, service people, investors who are buying at the moment. With so many projects coming up in Bombay, the rates should ideally be stable so that a lot more people can buy houses. Also, the maintenence charges is one of the main issues today wherein people were earlier paying a small amount and now in the new buildings have to pay at least three times of what they were paying. Also many facilities being offered are not optional but compulsory. The parking space sale is also a scam in the making as is the super built up area calculation.
But the nexus of all the people involved is so strong, that most of the govt. rules are only on paper. Otherwise, how would buildings which do not have proper permissions be allowed to be built.

Anonymous said...

Yes obviously most of them are going to say the property prices are high. So am I. I live in Pune and the prices there have become comparable to suburbs of Mumbai. Till 2006 prices in Pune were say suppose X now in 4 yrs they are 10X. But the point i want to make here is is the unawareness of the buyer. Super Built up etc is so confusing that there is an immediate need of a private body to address these issues.

Anonymous said...

I am living in Dubai for last 2 years. I hoping to see this bubble to burst to by a property in Mumbai. The fact here is property prices are just going up & has not seen downward movement. Its just not me but my friends who want to buy a good place to stay in a descent premises. But its really not affordable with kind of money is involved, quality of flat & space (in sq cubic feet)!!
When the quality is compared to the flats in Dubai its nothing!! Look at how spacious are the flats & surrounding area in the properties here.
Moreover, the kind of black money is involved is rediculous. A builder/owner simply ask for 20% to 30% black money as down payment!!
No monitoring authority for the real estate & common man, although an NRI :( like us cannot afford to buy a compfortable space.
My personal experience say that, even after paying such money, its a buyer who suffer by paying taxes, society fees, legal fees for his house when a builder does not provide the services he commited & the conveyance of the property in the name of housing society.

Anonymous said...

For the past one month, our family has been scouting for buying a Flat in Chennai Suburb. While brochures issued by Realty Cos are so attractive, back of the sheet calculations indicate that there is no correclation between land price,construction cost,charges etc. Nobody tells what proporion of the large Complex is offered as undivided share for the buyers-within the residential area, Total Complex incl Malls,Clubs etc.

Our analysis of prices quoted by leading bulders of the Country indicated that Land Cost(3 Times Guideline value)+ Cost of construction(Rs.1250/Sq.ft a very lavish rate for Chennai) account for only about 50% of the cost of Purchase,indicating that balance 50% or so is towards Builders Margin,unwanted Support Facilities ,too high a proportion. Further, FSI,based on Super Built up area workds out around 1.6(incl.Balconies etc),which is beyond Govt regulated Ratio of 1.5.

Also, Buildrs want the buyers to join the Club with a committed Annual Family Membership Fee,Compulsory Maintenance by the Builders for a long period of time say upto 15 Yrs.etc.

We do not know what will be fees for the Schools attached to the Complex and prices at the Malls which form part of the Complex.

This is my broad Obbservation on the present status of Large Projects in and around Chennai.

We do not know how, one can survive and run the family with these costs of Part of living.

Anonymous said...

At Chennai, buying a plot of land and constructing a house to one.s liking is not feasible even for a person earning Rs 9 lakhs per annum. One can only go for moderately priced flats viz 40 lakhs with 3bed room accommodation. However, one cannot guarantee the quality of construction as most of the flat seekers have no or less knowledge. There should be one All India forum to guide these homeseekers for proper guidance.


Anonymous said...

1) Flat prices should be on carpet area basis strictly. User can then actually measure what he is buying.( Can we accept paying for 1 kg of butter & getting only 700 gms of it in return ? )
2) If cost of construction is Rs. 750 to Rs. 1500 per square foot in Mumbai, there is no reason why flat prices are for Rs. 5000 to 20,000 per square foot.Prices should be based on cost plus basis.
3) Restrict bank loans to builders who sell flats costing upto Rs. 50 lacs. Those builders who want to build luxurious flats can do so & charge as they want but they have to stand on their own feet. They should not be offered tax-payer's money by banks as loan.Let them find their own ways to finance their projects.Nothing wrong.

M. Pradeep

Anonymous said...

Yes, I too would be happy to see the real estate bubble burst, burst like nobodys business...but then, politicians in India have so much at stake, they will keep bailing out the builders time and again with public money. I live in Kandivili a distant suburb of Mumbai, where prices were ruling between 1500 to 1800 per sq. ft. till 2002. Now it is whopping 7000 to 10000. Meaningless surge....helped purely by atrocious govt policies.

Anonymous said...

Bubbles seem to collapse under their own weight, but they do so in a series of dead cat bounces which lure greater fools to catch themselves falling knives on the long and bumpy ride to the bottom.

Enjoy the ride, fools!

Jayant said...

A big thief is out of picture.

Interview with the Banker

Talking about builders, HDFC has mastered the art of lending to developers and salvaging the money with very little NPAs

We have worked with the developer community for 30 years, when housing finance was new. And with our help, support, finance and advice, all developers have achieved phenomenally large size — whether they are in Mumbai, Delhi, Kolkata, Chennai or wherever. They look back on our support and cooperation that have helped them to grow. We have had issues with them. We have had issues over over-leveraging, quality, carpet and super built-up area

We have allowed banks to restructure builder loans.. nowhere it has happened. Do you think it was wrong?

When you say restructure a loan, each project has to be looked at separately. In India, we have situations where notices are issued after approvals and while construction is get a notice saying ‘stop construction in this is part of the forest land’. What would the builder do? It stopped all construction for eight months.

So all the restructuring of all the loans than happened all over India because the construction was happening in the forest land. This is the main source of a problem. The builders/brokers/politicians are in the frenzied mood, drunk to the hilt. But the big question is who is providing all that liquor. It is these crook bankers who know very well that the builder is fleecing the customer but in spite of it they will provide all the support, "Guidance". They are the one who helped avoiding ( delaying) the real estate crash. They know very well that the last drop of the blood can be sucked from you LEGALLY once you become the longtime slave.

The bankers are teaching ( Expert Advice) the new tricks to these thieves about how to steal more money via other sources i.e. PE, QIP, Mutual funds. They don’t give damn about whether it is ethical or not because they are getting the commission. Please don’t buy any house and let these banks play the hideous game. They are just delaying the day of the reckoning. The Banks/Real Estate cartels can’t avoid the inevitable of housing bubble crash.

Please don’t park the money in big cheater banks and invest in Mutual Funds which gamble your money in Real Estate company's shares.

Anonymous said...

Chor Banker admits to conning people

Teaser rates have been called a moral hazard in the West. Banks who adopt this kind of predatory lending practices have been denounced in the severest possible terms.

What OP Bhatt is saying is that banks like SBI have purposely given loans to people at 7.5-8% under the variable interest rate policy to then change it to 10-12% later and now with the PLR changing because of measures RBI will announce, the rates will go to maybe 14-15%!!

I think some intelligent folks have been saying for a long time in this blog that the greater fools are going to get killed. Also, RE will drop by around 2011-12 timeframe! So now there are people who will have to pay more than twice their teaser EMI's for a possible longer time....welcome to EMI slavery. People who have sat on cash! their days are near...soon you will be harvesting the rewards of patience.

Anonymous said...

Vulture is gone crazy poor fellow he is posting one year old link of ET

Anonymous said...

Problems for Real Estate Sector

1) Price Rise for Cement, Steel
2) Price Rise for Petrol, Diesel resulting in increased transportation costs
3) 10.3% Service Tax on the payments made for Under Construction flats. (Before the completion certificate of the Flat.)

All these factors would make Flats more and more unaffordable for buyers.

Also, the RBI and Banks will not be able to continue restructuring the loans forever, which are given to Builders and Real Estate Companies.

Seeing this high unaffordability, Indian Real Estate would start crashing in coming months.

Buyers, do not buy and do not get trapped.

Sam said...

Surely most of you whining morons realize that your NRI brethren are the real cause of this bubble.

I bet 90% of comments here are from NRIs who thought they could swoop up real estate using the $1 = Re 46 advantage. Well, guess what? We are all sh*t out of luck. The time to get in was 5-8 years ago. Property prices ain't coming down anytime soon.

India is not the US. Limited supply with everyone looking at the same 1000 houses in the same 5 areas means the price floor is pretty deep.

rajni sharma said...
This comment has been removed by the author.