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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