Rising Rates raise Default fears
New Delhi: With banks increasing floating home loan rates, following RBI’s decision to tighten money supply, life of old borrowers is becoming tough. The imapct is so severe that many of them have become potential defaulters.
And aspiring borrowers are disappearing from market. Although banks are left with no option but to cover cost of funds, while coping with rate hikes, they fear that their bottomlines could be affected with possibility of defaults and losing of new customers.
Just imagine, In two years since November 2004, EMIs have gone up by around 48%. Most of the time an individual over-stretches himself when he goes for a loan to buy a house.
He borrows up to the maximum-allowed limit, cosidering his income. Any increase in interest outgo after that puts an excessive burden.
Generally, banks give loan to the extent where EMI is around 50% of one’s monthly take-home salary. As EMI has gone up by almost 48%, the monthly outgo in repaying the loan has become around 75% of one’s salary.
Even if salary increases by an average 8%, EMI would be around 63% of the monthly income, which is very high and poosibility of default will increase.
Chhaya Mishra, a middle class borrower, who had borrowed in 2004, says she is finding it difficult to service the loan and sometimes feel selling the house to repay.
When interest rate was increased one to two percentage points, banks increased the loan tenure, keeping the EMI at the old level. As the hike was small, it was possible.
It saved banks from hardship of collecting new cheques with increased EMI. Now as interest rate from base year has gone up by 5%, this is not possible.
In case of a Rs 50 lakh loan for 20 years, the EMI was Rs 37,279 when the interest rate was 6.5%. Out of this Rs 27,083 goes to pay the interest.
But, when the rate goes up to 12%, this amount in the first month would be more than Rs 37,279. Therefore, a bank has no option but to increase the EMI.
When banks ask for new cheques, they do not allow the period to be more than 20 years. This increases the EMI sharply. Besides, if one’s retirement is 18 years away, his repayment will be kept at 18 years.
Fresh borrowers loan-taking capacity has affected very badly. At lower EMI, his borrowing limit was higher. But at higher EMI, because of rise in the interest rates, the maximum amount that a bank will now lend, has come down.
This means, he will have either to settle down with inferior quality or smaller house or he will have to abandon his plan to buy a house.
In most cases, people are abandoning their plan, said a banker. He said banks are also not very keen to lend as their liquidity condition has become tight.
This, bankers say, will affect the real estate and other connected sectors very badly. In the medium term this will have an adverse impact on economic growth.