Lenders cut EMIs, raise tenure to lure home buyers who deferred purchase

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CHENNAI: Dewakar G is looking to shift his home loan to another bank or housing finance company (HFC). Currently, he pays an equated monthly instalment (EMI) of Rs 26,048 on a home loan of Rs 22 lakh – which works out to Rs 1,184 per lakh.

“Many of them (lenders) are offering schemes at Rs 900 per lakh or slightly below. On the face of it, it looks tempting as there would be a lower EMI outflow if I opt for Rs 900 per lakh as against Rs 1,184 per lakh, which I am currently servicing. I am in talks to get the best possible deal,” he says.

Already, home loan rates are pegged to base rates (9.7-10.25%) or close to them. To boost business, lenders are pitching EMIs below Rs 1,000 for every lakh of rupees availed. The calculation for monthly home loan repayment has been roughly Rs 1,000 for every lakh for a loan availed for up to 20 years. Banks are now lowering EMIs to Rs 900 per lakh or even below by extending the tenure by up to 10 years.

Punjab National BankBSE 0.81 % has a scheme wherein the EMI is Rs 926 per lakh on a loan of up to Rs 75 lakh and a tenure of 25 years. Interest is pegged to the bank’s base rate of 10.25%. “Through this, we are looking to extend repayment tenure for the borrower up to 65 years or even 70 years of age,” a senior official of the bank said.

Similarly, under its Bhagya Lakshmi housing scheme, LIC Housing Finance is offering Rs 903 per lakh for a 30-year loan at 10.35%. “Such schemes help bringing in fence sitters (those who are deferring home purchase in anticipation of a realty price correction or interest rate revision),” said V K Sharma, director and chief executive, LIC Housing Finance. Average loan offtake for the company is Rs 17-18 lakh and repayment period usually ranges from 15 to 20 years.

The move towards longer tenures is a reflection of the confidence banks and HFCs have on borrowers. Gross NPA (non performing assets) on home loans for nationalized banks is 1.8% and for HFCs the figure stands at 0.44%. Also, the average tenure of home loans in India ranges from seven to 10 years depending on the institution and credit offtake.

“Besides, such schemes are attractive from a balance transfer perspective as the new company is getting a seasoned borrower in the first place. There are not much costs involved in loan appraisal and underwriting as the loan did not originate from the company taking over and all this results in an immediate growth of the balance sheet,” said R V Verma, chairman and managing director, National Housing Bank, the apex body for home loan finance in India.

The country’s largest lender, State Bank of IndiaBSE -0.18 %, also has a Rs 874 per lakh scheme for 30 years at 9.95%. The bank’s home loan business reported a year-on-year growth of 18.4% to Rs 1,24,772 crore in June 2013 as against Rs 1,05,383 crore a year ago.

Others like Dewan Housing FinanceBSE 2.32 % are also looking to introduce a lower EMI scheme. “We are contemplating on introducing a 30-year home loan product to help the customer avail of lower monthly outgo towards the home loan,” Anoop Pabby, president, strategic initiatives, Dewan Housing Finance said.

However, some industry observers say such marketing tactics can only provide short-term gains in market share and that a calculation of Rs 1,000-plus for every lakh of loan availed would be the only sustainable level in the long run given that margins in the home lending business are around 1-1.15% currently. “As of today, incremental borrowing costs range from 9.5% to 10.3%. At best, such schemes help in taking over loans or converting fence sitters into borrowers. Ultimately, to prop up demand as well as business, we have to move to tier II and tier III locations,” Sharma said.



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