Home loans: rise in slippages worry banks

Banks have begun stress testing their realty assets as delinquencies in loan service payments begin mounting.

Bankers said that many banks were facing overdues on some of the past realty loans and some home loans. The slippages noticed were mostly through an increase in overdue debt service payments for up to one month. In the past, overdue payments were very low.

Bankers said that in at least 10 per cent of the home loan accounts, they had experienced such slippages.

Two years ago, when rates were low, the slippage was minimal. Only about 2 per cent of the home loan accounts experienced such slippages, the bankers said.

Such slips in debt service payments notwithstanding, banks see little need to classify the accounts as sub-standard assets.

Vijaya Bank’s Chairman and Managing Director, Mr Albert Tauro admitted “There is an increase in debt service payment slippages. But this is not an immediate cause of worry.” This was because despite the overdue payments, they were yet to reach the threshold level of 90 days. Assets are classified as non-performing only if the debt service payments were overdue for more than 90 days. Besides, for most banks, realty and home loans comprised less than five per cent of their gross assets.
Unfinished projects

Bankers said some realty projects had been left unfinished for want of buyers, increasing the risk of loan delinquencies.

As a result, most of them were limiting loans to the realty sector to contain risks and assessing potential risks through stress testing of the assets.

Stress testing implied assessing the potential for asset delinquency. Asset delinquencies were on the rise in several public sector banks.
Rising NPAs

Bankers are resorting to moral persuasion, persuading borrowers to settle their overdue payments.

However, despite such efforts, NPA accounts have been on the rise. In the second quarter of the current financial year, the average NPAs of the banking sector is already close to 1.5 per cent of advances.

For the last financial year, the average was about 1.3 per cent of advances.

Banks’ worries are not just confined to rising NPAs in the realty sector. In many cases, the loan-to-value (LTV) ratio has dropped below the prudential level of 1.5. Under current guidelines, banks are expected to maintain physical asset coverage of at least 1.5 times (150 per cent) the loan value.

Normally as loans are amortised, LTV ratios tend to rise. A falling LTV, however, implied depreciation in the value of assets.
Distress sales

Mr Lakshmi Narayanan, president and Chief Executive Officer, The Real Estate Bank of India, said “Distress sales have increased. Some developers are resorting to discounted sales for meeting liquidity requirements.”
Balance sheet losses

Realty prices consequently are sliding. LTV ratios are currently down to 1.22 with the drop in the value of realty prices in most metros.

Bankers said that if realty values dropped further, LTV ratios were also likely to drop further. This meant that in the event of loan foreclosures, banks would have loan losses on their respective balance sheets.