BANK BODY DEVISES CHECKLIST TO REDUCE BAD HOME LOANS
07.05.08 (11:28 am) [edit]
The country will require housing for 20.3 crore people by 2015 with an additional demand from 1.6 crore urban populace. However, realisation of this demand is closely related to GDP growth and interest rates. Hence, a 10% increase in the final expenditure in the construction sector increases GDP by 3%.
Other risks to the home loan sector come from issues like a decrease in the loan to value ration (LTV), which is calculated by dividing the loan amount by the market value of the property. One finding indicates that a 10% decrease in the LTV raises the odds of default by 2.173%.
These are some of the findings in a report by the National Institute of Bank Management (NIBM), an industry organisation, for the National Housing Bank (NHB). The survey is based on 14,000 housing loan accounts taken from across the country, allowing the NIBM to say, among other things, that they have devised a checklist for HFIs to use when disbursing instant loans to ensure lower chances of default.
The central government is working on a Housing Start Up Index (HSUI), similar to the consumer price index, to project details of construction activity and its impact on prices of construction-related items like cement and steel.
"We have studied the macro and micro level data, providing profiles of would-be borrowers, factors that influence house sizes, causes of default and suggested remedies. This has been possible since we have taken actual borrower account data from banks and housing finance companies," NIBM director Asish Saha said. In the context of loan default, the report notes that default is lower in cases where the house is larger in size, the monthly income is higher and the age of the borrower is lower.
The survey has thrown up some unexpected insights. Default is also lower when banks or lending institutions see higher additional collateral. This has ramifications when cash transactions are involved, which is necessarily paid by the borrower and is not included in the sanctioned loan. This gives the lending institution a greater level of comfort since the borrower now has a higher exposure to that property. That greater financial involvement reduces the likelihood of default, hence offering greater comfort levels to the lending institution.
"At the micro level, our findings show that a typical borrower is most likely to be a male of 40-50 years although 25% are below the age of 35 years. There is a falling trend in the average age profile, when it comes to housing demand," co-author and assistant professor, finance, Arindam Bandyopadhyay, noted.
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