| Home loan disbursals to slow down in 2007-08- CRISIL
Asset quality remains comfortable, but profitability will be muted
Home loan disbursals are likely to grow at 20 per cent in 2007-08 according to a study by the
credit rating agency CRISIL, a Standard & Poor’s company. This rate is lower than the 30 per
cent annual increase seen in the past three years, but in absolute terms represents a substantial
expansion. The slower growth reflects the impact of rising property prices and interest rates:
property prices in the metros and Tier I cities have grown at a compounded annual rate of 30-
40 per cent, and interest rates have increased by a total of about 400 basis points, since
October 2004.
There have been questions about the sustainability of disbursement growth in an environment
of rising property prices. CRISIL’s research shows that, while these increases have resulted in
a weakening of the affordability index1, at 5.2 this parameter still compares favourably with
the indices for other developing nations. Therefore CRISIL believes that, despite the
currently high level of property prices, demand for mortgages will continue to grow.
Similarly, CRISIL’s study highlights that increases in interest rates in recent months have
only moderately impacted new mortgage disbursements, because today’s borrowers are
younger than their counterparts of a few years ago, and their incomes are rising faster.
According to Tarun Bhatia, Head, Corporate & Government Ratings, CRISIL “The
changing age profile of borrowers allows lenders to sanction loans of longer tenures. If
interest rates increase, tenures can be increased to ensure that the loans amortise fully before
the borrowers retire.”
Mr Bhatia adds that, by strengthening borrowers’ capacity to repay, rising incomes also
support lenders’ asset quality. Moreover, the continuing trend of 8 per cent prepayments in
the Indian mortgage market partly neutralises the effect of rising interest rates.
The outlook on lenders’ profitability, on the other hand, is not as sanguine. Small housing
finance companies, in particular, face declining profitability because of heightened
competition and increasing borrowing rates. The incremental net profitability margins of
housing finance companies reduced to 1.52 per cent in the first half of 2006-07, from 1.76 per
cent in 2004-05. Many housing finance companies are borrowing short-term to counter this
trend, a risky strategy in a rising interest rate scenario.
CRISIL’s ratings on housing finance companies remain stable. According to Raman Uberoi,
Senior Director, CRISIL Ratings, “Housing finance companies continue to enjoy strong
parent support and capitalisation. These factors will enable them to maintain their ratings at
current levels over the medium term. On its short-term ratings, CRISIL continues to watch
the management of asset-liability mismatches very closely.”
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