Housing loan borrowers may be comfortable with loan to value (LTV) and EMI-to-income ratios, but housing affordability has worsened, according to the latest RBI report. It added that the slowdown in credit demand suggests possible deterioration in bad loan ratios in the near-term though the timing and extent of the slowdown was still yet to be ascertained. Housing loans should still witness the lowest delinquency ratio, according to Kotak Institutional Equities Research.
In its report on housing asset prices, RBI has put out some interesting data on asset prices. Between March, 2015 and March, 2019, it was found that the median LTV ratio increased to 70 per cent from 68, while the median EMI-to-income (ETI) ratio remained steady, with Mumbai, Pune and Ahmedabad recording higher median ETI. However, housing affordability worsened during this period as measured by house price to monthly income ratio.
“A cyclical slowdown in retail is probably underway as we are witnessing it across retail products, especially in auto and personal loans. There seems to be some sort of pullback by consumers though there is uncertainty on what is driving this slowdown at this point. There has been a sharper-than-expected decline in various asset products within the retail portfolio,” Kotak noted. Retail bad loan ratios, as reported by credit information bureaus, are still stable or rising faster than loan growth. This slowdown in growth could result in a higher ratio and result in lenders tightening their individual credit standards, it reasoned.
Moreover, a sharp rise in interest rates would have been quite worrisome as the ability to extend loan tenors would have been challenging and borrowers would have had to increase their EMIs. “However, as the current medium term outlook on interest rates is a lot more benign and there are no signs of major job losses, it would be pragmatic to assume that the asset quality in housing loans should not show any major signs of stress,” Kotak said.
“As the LTV or median EMI to income has not changed despite worsening of affordability, it could mean that the consumers are probably being offered longer duration loans,” it concluded. The base period for observation (FY15) was also a period of higher interest rates on housing loans (over 10 per cent as against 8.3-9 per cent in recent years) and given the possibility that the average age of the borrower was lower, it gave lenders confidence to extend longer duration loans.