The Hindu Business Line : Homing into trouble?

For more than a year the Reserve Bank of India has been sounding warning bells about the pitfalls of over-lending to the housing sector. In almost every Monetary Policy Review, the central bank appeared none too happy that the housing segment of retail trade and the overall services sector were grabbing the chunk of bank loans. With a growth of 14 per cent last year, trailing industry's 30 per cent absorption of bank credit, and far ahead of agricultural credit expansion, the housing sector has been the star borrower for banks. Rising incomes on the back of an average 7 per cent growth in GDP precipitated demand for housing from all income groups; armed with securitisation laws banks have been merrily lending to a sector that had been far too long starved of credit.

Mindful of the havoc that the unbridled credit to the housing and construction sector played on banks in East Asia, the RBI chose to tread a cautious path; backing its concerns with policy, the RBI raised repo rates twice in succession this year with a view to raising interest rates and the cost of housing loans. Even at 9 per cent, up from the lows of six per cent, the demand for housing loans is unflagging. From inflation's point of view, runaway credit for housing can be damaging, a concern that has been voiced by the apex bank. But an equal worry is the spectre of defaults that has now come to haunt banks and perhaps the RBI. Recently, the RBI Governor, Dr Y. V. Reddy, voiced his concern at "excessive borrower optimism" reflected in the fact that housing credit had risen more than 50 per cent on average over the last five years. The Indian Banks Association recently announced it intends collecting data on defaults and asked member banks to provide it with the requisite information. Such a step is indeed welcome because if there is one concrete guide to policy it is the evidence on the ground.

The IBA move portends a new development; India has had a low rate of default in the past, even when there were no mortgage foreclosure laws. The middle-class was a keen borrower and an equally eager re-payer. Not any more. One indirect reflection of the increase in default was provided by the RBI Governor when he observed that consumer complaints against harassment of housing and consumer durable loan recoveries now constitute 34 per cent of all client complaints against banks. The IBA request for data on delinquencies in housing loans should highlight a typology of defaults for sustained credit and economic growth. While some default may be the result of hardships, requiring "credit counsellors" according to Mr Reddy, the discovery of frauds will plug loopholes in loan procedures.

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