Banks offer easy repayment solutions to customers facing crunch

Earlier this year interest rates have climbed up and companies have started laying off staff and tightening employee costs due to financial crisis, the recovery teams of banks therefore from the past few months housing finance firms have started offering at least half a dozen easy repayment solutions to a growing number of borrowers who have been hurt by the slowdown.

Ashish Wagh, a senior executive with a foreign investment bank, recently contacted his mortgage lender for a help after his company started cutting jobs and cutting down salaries. Earlier this year, Wagh had taken Rs80 lakh home loan to buy an apartment in Bandra, a Mumbai suburb, to be repaid over 20 years at an annual floating interest rate of 11.75%.

Now Wagh is thinking of selling his ancestral property in Pune to repay back nearly half the loan amount and so that he can avail a two-year freeze—a legal authorization to delay payments. He refused to name the mortgage firm as this could harm his negotiations with it.

On the other hand lenders are getting lenient in offering easier terms to existing borrowers as they want to prevent an increase in the proportion of non-performing assets (NPAs) on their books and the worth of their collateral—the houses—which declined sharply this year with falling real estate prices.

According to the Reserve Bank of India latest data as on 29 August banks had offered home loans worth about Rs2.69 trillion, but between 1 September 2007 and 31 August growth in home loans went down by 13.9% at Rs32,792 crore, from 17% in the previous year.

On the other hand interest rates increased on home loans from 7.50% in 2003 to 11.75% in August, which increased pressure on borrowers who had taken loans at floating interest rates.

For instance, if a person took a Rs20 lakh home loan which is to be repaid back over 20 years, his monthly repayment move up from Rs16,418 in November 2004, when the interest rate was 7.75%, to Rs21,674 now.

Housing Development Finance Corp. Ltd, or HDFC, is the oldest mortgage lender in the country, offering its existing borrowers the more common options of extending the term of the loan without raising the interest rate, or increasing the equated monthly installments after closing other debts such as personal or auto loans.

“In case a customer is servicing multiple loans such as a housing loan, vehicle loan, personal loan, and has to make the choice to repay, it is advisable that the customer evaluates the loans and decide to repay the loan based on its cost and impact on cash flows,’’ said HDFC’s joint managing director Renu Sud Karnad.

For additional collateral, some lenders are ready to allow borrowers to “balloon” the loan till the end of the tenure or make a large payment towards the end. Borrowers can also get the option to choose to make large payments, or so-called bullet payments, every year so that the term of the loan is trimmed.

While Axis Bank Ltd, depending on an individual’s future cash flow, is even allowing borrowers to guarantee savings instruments in return for easier repayment terms.

A senior official at ICICI Bank Ltd, India’s second-largest lender told, “Depending on the customer’s need we take a three-pronged approach, which includes increasing the tenure of the home loan, keeping the interest rate constant for a limited time frame, and ballooning up the loan towards the end of the tenure”.

“(But) we do not encourage customers to opt for the option of deferring the payment towards the end of the tenure of the loan as it increases the debt burden on the customer. The chance of default also increases,” he added, asking not to be identified because he isn’t the bank’s official spokesman.

Another reason which forced borrowers to restructure their home loans is delays done by builders for various reasons.

“Some builders are finding it difficult to complete the housing project on time (and are) hence delaying the possession of the flat. In such cases, banks have seen many customers come to them and ask for a re-scheduling of the loan,” said a senior official with Axis Bank.

“All the major real estate developers are seeing a time overflow, hence this is a very common request we are getting from customers,” added this official who wished not to be identified.