Sour dream

Calcutta, March 15: Defaults in the home loan segment are on the rise with companies slashing jobs as part of their restructuring packages.

“People who lose cushy jobs generally stop paying the equated monthly instalments (EMIs). When the disruption continues over a couple of months, the borrower tends to join the list of permanent defaulters,” said a senior official of Bank of Baroda.

“Corporate downsizing is becoming a major threat to the banking industry. Our credit risk management has received a body blow due to sudden job losses,” a State Bank official said.

An official spokesperson of the Reserve Bank said, “Housing loan defaults are not yet alarming.”

However, banks and housing finance companies are worried about the steady increase in defaults.

Bankers feel this is the negative fallout of the continued intense competition among banks and housing finance companies for an increased share in the home loan market.

Bank officials dealing with housing finance also put the blame on the “reckless policies” of some lenders.

The wrong practices mentioned include over-financing of the asset or a high proportion of loan compared with the asset value.

“Defaults are definitely on the rise. Some of us have not been adopting sound lending policies and have been quite reckless.

“Often the margin (upfront payment) taken from the borrowers is not enough to cover the price fluctuation of the property. Loan has been cleared for up to 95 per cent of the value of the dwelling unit,” the SBI official added.Defaults are rising in places where the property prices are on a downswing.

“We have noticed that repayment interest has fallen in places where property prices are going down,” he said.

However, most defaults show up at an early stage of the borrower’s repayment period, he added.

A senior banker feels that the defaults are on account of high loan to asset value extended by the lenders. The default on home loans was more when there has been a definite intent of defrauding the system.

“There are instances where salaries are inflated to get higher loan or imperfect security is given or a wrong valuation of the property is done to extract a higher loan. Though we try our best to guard against all these, there is no fool-proof system to tackle those seeking a loan only to misuse the system,” the banker added.