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Rediff News  All News  » Business » Bad home loans have banks on toes

Bad home loans have banks on toes

June 22, 2007 03:48 IST

For the first time since the housing loan boom, the country's top three home loan providers, State Bank of India, ICICI Bank and HDFC, are approaching the Asset Reconstruction Company Ltd to sell bad loans from their home loan portfolios.

The move has been prompted by a sharp rise in defaults from retail customers, squeezed by rising interest rates, in the last two quarters.

Arcil is a company that buys bad loans at a discount and sells the assets for a profit. All three institutions are selling home loan portfolios worth Rs 250-300 crore each, sources close to the developments said.

While Arcil will take these loans on its own balance sheet, a subsidiary will be set up to service the loans -- in terms of valuing property, collecting cheques and so on.

The retail loans, scattered across the country, will be taken over by Arcil for Rs 100 crore to Rs 150 crore each.

"We are in negotiations. These deals are expected to close by the second quarter," the sources added.

Interest rates on home loans have risen from 8-8.5 per cent to 10-12 per cent in a year's time, a result of the Reserve Bank raising the cost and reducing the availability of money to achieve monetary policy objectives. As a result, borrowers have seen their equated monthly installments rise significantly.

"In many places, builders have failed to give possession of the apartment and the customer was unable to pay EMIs as well as rent for his present accommodation. The double blow for retail customers has increased the incidence of bad loans," sources in ARCIL said.

Several banks have reported a 3.5 to 4 per cent default in home loan repayments, against less than 2 per cent a year ago. State Bank of India Chairman O P Bhatt recently commented that rising interest rates would result in higher defaults for India's largest commercial bank.

ICICI Bank, HDFC and SBI have grown their portfolio at an average annual rate of 28 per cent in the past three years. Though HDFC says it has not seen a deceleration, SBI has seen growth slow to 18-19 per cent in its home loan portfolio.

Once the loans are in Arcil's portfolio, the Mumbai-based firm will either offer a package to existing customers to pay off the loans or sell their property to the highest bidders.

Dev Chatterjee in Mumbai