The Evolution of Home Loans in India
Banking in India is very old. Nationalised banks are in existence since 1969. However, Home Loans are a comparatively new product. In the 1970s, there was no concept of Home Loans in India. HDFC was the only organised player in the Home Loan market.
The first Home Loan borrower
The credit for availing the first Home Loan goes to one D B Remedios took a Home Loan of 30,000 from HDFC in 1978 to construct his house in Malad, Mumbai. The total cost of the house was 70,000. Thus, you can see that Home Loans are just four decades old.
The Home Loan scenario
In the past, the mentality of the people was to save and purchase. People used to dip into their Provident Fund savings and retirement benefits to raise money for constructing houses. HDFC started the trend of Home Loans in 1978. Banks were reluctant to finance Home Loans because there was no recovery mechanism in place. The only recourse available to banks was to file a civil suit in the court of law. The litigation expenses were higher than the actual loan amount.
It can surprise you that the Home Loan interest rates were around 11-14% up to 1994.The average age of the Home Loan borrower was about 42 years with the average amount of loan being 39,000 (Source HDFC).
With the opening of the economy in 1991, banks started to enter the Home Loan market. ICICI Ltd (later on merged with ICICI Bank) ventured into the Home Loan market in 1999. The year 2000 saw the introduction of the floating rate concept by ICICI Bank. The rates started plummeting from around 2003-04 when floating rates for Home Loans were in the range of 7% to 7.25%. The fixed rates were around 7.5-8%.
State Bank of India entered the market in a big way and introduced the teaser rate concept. They could afford to do so because of the high proportion of CASA (Current Account Savings Account) deposits. Other banks did not have this advantage. They resorted to measures like maintaining high Loan to Value (LTV) ratios to attract customers.
During the early days of Home Loans, the LTV ratio used to be less than 50%. The increase in the competition saw the LTV ratios go up to even 120%. Subsequently, the Reserve Bank of India (RBI) capped it at 80%. Banks have the freedom to go up to 90% in case the loan is for less than 30 Lakhs.
SARFAESI Act 2002
Before 2002, there were no regulations to deal with defaults on home loans. There was a need for strong legislation. The introduction of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) in 2002 gave banks the power to deal with Home Loan defaults. This Act encouraged the banks to foray into the home loan sector.
The freeing of the interest rate regime:
With the opening of the economy, the RBI gave banks the freedom to fix their rates of interest on Home Loans depending on the cost of funds. It blew out into an interest rate war with banks competing against each other to offer the best rates to the customers. There was a spate of Home Loan offers from banks trying to entice customers.
Even today, the floating rate regime is prevalent in the industry. Some banks offer fixed rates but only for a specific period, after which they convert to the floating rate concept.
The growth of the Home Loan sector
As banks started feeling comfortable giving Home Loans, customers began availing them. Hence, the average age of the Home Loan borrower began reducing. Today, the average age is around 32 years. Customers have realised that taking a Home Loan to buy a house is better than doing so with their savings. The Government of India has played the role of the catalyst in the growth of the Home Loan sector by introducing concessions in income tax for home loan borrowers.
Today, these concessions are one of the principal reasons why people opt for home loans. Banks have also come up with various new products like Home Loan Balance Transfers, loans for purchase of plots, loans for home renovation and improvement, and so forth.Today, home loans constitute a significant portion of the bank’s loan portfolio.
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