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Lower eligibility due to demonetization
- Lower eligibility due to expectation of 20-30% drop in property prices
- Interest rates may fall only 50-75 bps due to higher NPA risk
- Higher demand for loans from traders and businessmen
- Banks and NBFC’s may tighten norms on surrogate and liquid income products
Lower eligibility due to expectation of 20-30% drop in property prices
Banks typically lend upto 70 percent of the value of property as loan against property. The ratio is higher for residential properties and lower (50-60%) for commercial and industrial properties. It is widely expected that demonetization of large denomination notes (Rs. 1,000 and Rs. 500) will reduce supply of money to property markets and result in drop in prices and MyLoanCare estimates a 20-30% drop in prices as below. Even though the actual impact on property prices may be known only over the next 3 month to a year, it is likely that in the interim period, bank valuers (agencies appointed by banks to value property for giving a loan) will assign lower values to property in order to play safe.
Likely decline in property prices post demonetization
|Delhi, Gurgaon, Noida, Gujarat, Kolkata, Faridabad||Mumbai MMR, Bangalore, Pune, Hyderabad, Chennai||Tier 2 locations such as Jaipur, Bhiwadi, Navi Mumbai, Ghaziabad, Coimbatore, Indore, Bhubaneswar, Lucknow|
|Type of property|
|Residential flats – affordable segment (Upto Rs. 50 lakhs)||10-15%||5-10%||10-15%|
|Residential flats – above Rs. 50 lakhs||15-20%||10-20%||15-20%|
|Residential property above Rs. 1 cr||20-25%||15-25%||25-35%|
|Commercial units, shops||25-30%||15-25%||25-35%|
|Land, Industrial units||30-35%||20-25%||30-40%|
Interest rates may fall only 50-75 bps unlike home loans due to higher NPA risk
It is widely expected that the lending rates of banks will decline in the coming months. At MyLoanCare, we believe that a 100 to 150 bps or (1.0 – 1.5%) reduction in bank rates over the next 3 – 12 months is likely. However, we are not sure if banks would be able to pass on the entire benefit of reduced rates to loan against property customers. Almost 90 percent of loans against property are availed by businessmen and self-employed professionals, both of whom have significant dependence on the cash economy. Cash flow squeeze and reorientation of business models will mean slippages in loan servicing and delays in payment of EMI’s in some cases. This would result in banks having to recognize higher NPA’s and provide for higher risk weight on loan against property portfolio.
Thus, even if the overall interest rates will decline, it remains to be seen how much of the reduction will get passed on to the property loans advanced by banks. Even existing borrowers may find it slightly difficult to refinance loans at lower rates due to lower property prices.
Higher demand for loans from traders and businessmen
Many small traders and businessmen used to fund their working capital requirements using either the liquid unaccounted cash they had or borrowing cash from informal sources. With demonetization, this cash has been rendered useless. Even if it is declared, the income tax levy would reduce the available amount by at least half. Thus, traders and businessmen would need to access organized sources of capital like banks and NBFC’s. As most of the people in this segment own properties, they would look to opt for loans against property as a cost effective means of meeting their fund requirements.
This heightened demand for mortgage loans would provide banks an opportunity to maintain or grow interest margin on loan against property.
Banks and NBFC’s may tighten norms; surrogate and liquid income products may be reworked
It is well known that many small businesses used to under report their actual turnover and profits in order to pay less tax. Some banks and NBFC’s have been lending against property to businessmen using surrogate income products like income multiplier, gross margin product, industry margin surrogate and banking surrogate. These products typically allowed banks to lend more than what they would have been able to lend on the basis of borrowers’ books of accounts. Such loan accounts are at higher risk of turning NPA. Further, a decline in property prices coupled with inability to sell mortgaged property in current market conditions will make recovery difficult in such cases. Banks that used to lend only based on conventional or vanilla income based products are unlikely to face this asset quality pressure.
MyLoanCare expects banks and NBFC’s to tackle this issue at two levels. First, banks are likely to closely monitor existing customers to whom they advanced loans using surrogate and liquid income products. Second, lenders will tweak their products to reduce the dependence on surrogates as most of the transactions are expected to move to books in coming months.
Overall impact on loan against property EMI, eligibility
Here is an illustration by MyLoanCare to help understand how the government’s demonetization move is expected to impact eligibility for loan against property combining the impact of lower property prices, lower interest rates and discontinuation of surrogate products.
Impact of demonetization on loan against property for businessmen and self employed professionals
|Before Demonetization||After Demonetization|
|Property Price – Rs.||15,000,000||12,000,000|
|Loan Against Property Rate – %||10.75%||10.00%|
|EMI – Rs. Per Lakh loan amount for 30 years||1,121||1,075|
|LTV Based Eligibility|
|Loan to Value||70%||65%|
|Max LTV Based Eligibility – Rs.||10,500,000||7,800,000|
|Income Based Eligibility|
|Reported Monthly Income – Rs.||100,000||150,000|
|Max Eligibility (Vanilla) – Rs.||6,244,714||9,771,031|
|Max Eligibility (Surrogate) – Rs.||18,734,143||–|
|Max Eligibility (Final) – Rs.||10,500,000||7,800,000|
|Estimated Reduction in Eligibility||26%|
So, in summary MyLoanCare expects that loan against property will be in greater demand in coming days but customers will need to accept lower property valuations. Banks may also insist on additional security or collateral in order to protect their principal. To calculate your eligibility online, use MyLoaCare Loan Eligibility Calculator.
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