'Teaser rates are not good for the borrower'

R.V. Verma, CMD, National Housing Bank, talks to Sarbajeet K. Sen about concerns over the rising property prices and how the recent RBI regulations can bring relief.

Sarbajeet K. Sen | Print Edition: January 2011

There has been concern over the rise in asset prices, including that for housing. Do you share this view?
We are concerned when prices rise abnormally. Of late, it has been happening in the real estate market, especially in the middle- and top-end segments. We are also witnessing a good credit growth in the sector. This makes it a serious concern because it also tends to fuel property prices. So far, we have been regulating the prices by way of recommendations or by moderating or raising the risk weight on certain categories of property funding.

Is the bubble building across the board or is it limited to certain pockets of the housing market?
The latest NHB Residex (the residential price index) for June with respect to 15 cities shows that nine cities registered an increasing trend and six showed a correction. Price movement depends on several factors. One is, of course, the base effect. If the market has already risen sharply, then the scope for it rising further will be minimal or it might show a correction.

The cap on loan-to-value ratio makes loans more affordable as it acts as a hedge if prices fall
However, in the markets where the base is low and which have seen some development around the city- roads and airports, more land for construction and positive policy environment-there will be a rise in prices. Small towns and state capitals tend to show such a rise in prices with all the attendant issues being addressed.

In its recent monetary policy, the Reserve Bank of India has prescribed several measures on housing, including a maximum loan-to-value ratio (LTV) of 80%. Do you think this will lead to a moderation in real estate prices?
Yes, we think it will. This can take place in two ways. Firstly, it can send a stern signal to the market and the lenders that the LTV is important.

Secondly, it can also be a sign that in case the property prices come down, the higher LTV loans given by lenders will tend to default. In the wake of rising real estate prices and fears of a potential bubble, even if it means erring a bit, it is better to do so on the side of conservatism and caution.

From the borrower's viewpoint, it means everyone will have to bring in at least 20% equity, which may impact various segments of borrowers differently. However, the cap on LTV can make loans more affordable since it acts as a hedge against credit risk in the event of the property prices going down. In the long run, it is a very prudent stipulation.

The RBI has also hiked the provisioning requirement on loans above Rs 75 lakh. What does the move indicate to the market?
This means two things. One, it is discouraging lenders to give loans above Rs 75 lakh. If they do give, they have to price the risk properly and provide adequate capital. Two, it encourages them to look for borrowers in other segments of the market, middle- or low-end, where funds are not flowing adequately. This can help the lenders to focus on different classes of a portfolio. It will provide a cushion in case such loans turn sticky or prove to be sub-standard.

Are you thinking of regulations for housing finance companies on similar lines?
Yes, we are doing this, but we still have to take a final decision on the issue.

What is your view on interest rates, given the tight liquidity condition in the market?
Interest rates will continue to harden for some time. However, a lot will depend on the RBI's forthcoming credit policy review.

Several lenders have withdrawn their teaser loans (which offer fixed rates of interest in the initial years and then convert to floating rates) after the RBI raised the provisioning requirement for such loans. How do you view this development?
I have consistently maintained that teaser loans are not good for any stakeholder. It is neither good for the lenders, nor for the borrower. In fact, it's not even healthy for the system at large.

If we see too many lenders coming into the teaser rate space and the critical mass of such loans is too high in a portfolio, it could become a systemic concern. This is because the volumes are large and many players are involved.

They are all being driven by competition to lower the teaser rates, which might lead to a situation where they under-price the risk without realising how much the consumer can absorb. This can result in a lot of uncertainty in the market and lead to credit risk for the lenders.

What is your advice to homebuyers for the coming year?
My first suggestion is that your decision has to be based on needs. Do not do so from an investment point of view. It has to be a consumer-driven, demand-driven buy.

Secondly, you should consider your own debt servicing capacity and tailor your loan, or pose your loan quantum to the institutions, accordingly.

Thirdly, there is a certain process of due diligence and appraisal that an institution is required to undertake. You have to be patient and in terms of your disclosure, the more transparent you are, the better it will be for you. As it is a long-term loan, everything is built into the repayment capacity. If one does not disclose the information adequately, it might create problems later.

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