Are financial institutions estimating higher default rates in home loans?

The structural demand for the Indian housing market is estimated to remain strong for varied reasons. 

One of the facts that will positively impact the housing market demands that India has a majority of the population in the young age group, i.e. belonging to the 25-40 years of age group. 

As per the statistics, presently, 2/3rd of the Indian population pertains to less than 35 years. The average age of first time home buyers is usually 35-40 years. Hence, in the coming five years, it is expected that a significant portion of the population will fall under the average age group of first time home buyers, which is 35-40 years, giving a rise in the structural demand of the housing market in India. 

Another reason for the Indian housing market to remain strong is its affordability and the attachment of Indians to own their first home. Indians migrating to other countries also prefer buying a house in India due to the housing market’s affordability in the country. 

Also, due to COVID, people have started to look for bigger houses with an extra room because both the spouses need a separate room to work from home; also, the children need separate space as the studies, and all other activities are happening online. Work and study from home culture have created the need for larger homes, which is expected to increase the demand for houses. 

How is the housing loan market performing? Are the NPAs higher than expected for home loans?

In the FY 2020-21, the housing loan disbursements were very low due to the onset of the COVID-19 and shut down of the economy; however, the disbursement in the second and third quarter started to gain momentum as the economies started to open up slowly. The housing loan disbursements in March 2021 was record-breaking high. This was as the people started to step out, and the economies started to open up.  

The banks and financial institutions are constantly monitoring the provisioning requirement of the loans considering all the possible situations, for example, the impact of the second wave of COVID. 

The average loan to value ratio for housing loans is very low, around 50-60%, meaning that the loan offered is much lower against the property’s market value. Hence, the banks and financial institutions are rest assured for their repayment of such low LTV loans as 40-50% of equity is offered by the borrower. In such a situation, the default rate is also improbable. In contrast, in case of default in repayment, the institution has a sufficient margin of safety to recover the loan by selling away the properties. 

However, the country has got a severe hit by the second wave of COVID from the end of March. The impact of the second wave remains to be seen. The speed of transition of the economy from the second wave to the other side when the economies start opening up and the population has reached herd immunity towards COVID will impact the demand and growth of the housing sector.   

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in