Increase in EMIs to put Additional Annual Burden of Rs 6000 crore on Home Loan Borrowers

According to a report by Crisil, increase in equated monthly installments (EMIs) due to rising interest rates and reset of teaser loans is expected to put additional annual burden of about Rs 6000 crore on home loan borrowers. Higher EMIs and slowdown in economic growth is also likely to increase bad loans for lenders.

To check inflationary pressures,  RBI hiked key policy rates 12 times in the past 18 months, leading to higher interest burden for home loan borrowers. The reference floating rate for the industry increased by 200-250 bps during the 18 month period, which translates into an average increase of 15% in EMIs. banks and housing finance companies reset their benchmark rates. However the increase has not yet affected customers who opted for teaser loan schemes launched in early 2009 to stimulate dwindling home demand. For a teaser scheme customer, the rates are fixed for the initial 2-3 years, and subsequently get linked to the prevailing market rates.

According to the Crisil report, a large number of borrowers who are on teaser loans will get hit with a sudden jump in rates when the teaser rates reset to market rates. This shift is expected to take place from April 2012. The difference between the teaser rate and the reset rate is likely to be as high as 300-350 basis points (bps).
The report highlighted that at the end of June 2011 quarter the asset quality of industry players like HDFC, LICHFL and DHFL deteriorated by 10-40 bps on a quarteron-quarter basis.

The report however mentioned on the positive side that yields for financiers will improve in 2012-13 as teaser loans availed in 2009-10 get reset to market rates. The yields for a teaser loan customer is expected to increase by 300-350 bps once they are reset to market rates. This will have a net positive impact of around 30 bps on the net profit margins of housing finance players in 2012-13.

The impact of rising interest rates is best reflected on the EMI of a borrower with a 15-year home loan for Rs 15 lakh. With the current mortgage rates hovering around the 11%, the borrower’s EMI would have risen by 15% from Rs 14771 to Rs 17049. If rates were to go up to 13%, his EMI will rise to Rs 18979.

Economists who met RBI governor D Subbarao on 11 October 2011 suggested that central bank continue with its rate increases as inflation continues to be high. However the bankers and corporates have asked the central bank to halt rate hikes. While bankers have pointed out to a moderation in demand, corporates have highlighted the industrial slowdown as the need for measures to revive the economy. Corporates specified that steep inflation is owing to international factors and rate hikes will do more harm than good to the Indian economy.