Banks increase margin to 25% on housing loans

Banks increase margin to 25% on housing loans
The Financial Express, May 26, 2009, Page 3

Praveen Kumar Singh, New Delhi

In what could reverse the effects of lower interest rates on home loans, some financial institutions have increased the margin requirement on housing loans to 25%. By doing so the financiers have made owning a home difficult, as people will have to contribute a higher sum from their own pockets.

LIC Housing Finance and HDFC have increased the margin requirement to up to 25%, which means they would finance only up to 75% of the house cost. While LIC Housing Finance has set the limit at 25%, HDFC has made it 20%, visits to the branches of these institutions revealed. The earlier level was 15% for both the institutions.

Although no formal comments could be obtained from the two institutions, officials dealing with clients said the financiers have raised the margin requirement on home loans. Rise in margin requirement means reduction in maximum limit that the bank would finance and increase in borrower’s contribution.

“We have raised the margin requirement to 25% from 15% earlier as the condition was such in the last few months. Now we finance upto 75% of the house price,” an official at one of the branch of LIC Housing Finance said. A client executive of HDFC said, “We finance between 75% to 80% of the home cost”. Ironically, official websites of both the institutions still state the maximum financing limit as 85%.

Last year, the government had asked public sector banks (PSBs) to extend home loans upto Rs 20 lakh at lower interest rates, seeking to increase the demand for houses. Following the call, PSBs under the umbrella of Indian Banks’ Association had reduced the interest rate on housing loan of upto Rs 5 lakh to 8.5% and above Rs 5 lakh to Rs 20 lakh to 9.25%.

Aping the PSBs, private sector banks and housing finance companies also slashed the interest rates on home loans. LIC Housing Finance is offering home loan of upto Rs 20 lakh at floating rate of 9.75%, while HDFC gives loan of upto Rs 30 lakh at 9.5%. “By doing so (raising the margin requirement), the financiers have nullified the impact of reduced interest rates. The aim at this moment should be to increase lending for housing,” Indian Banks’ Association chairman and Bank of India chairman and managing director (CMD) T S Narayanasami told FE.

Bank of Maharashtra CMD Allen C A Pereira said, “Risk weight on home loans is very high. That may be one of the reasons why these institutions have raised the margin requirement.” At present, the risk weight as set by RBI is 75% on home loans up to Rs 20 lakh. For housing finance companies, risk weight ranges from 50% to 100%, depending on the amount of loan. Financing institutions have been demanding for a cut in risk weight so they could have more capital available for lending and earn higher revenues. UCO Bank chairman and managing director SK Goel said, “Higher margin requirement is a consideration for financing institutions for giving loans at lower interest rates. Also, continuously reducing home prices may put to risk the funds given by the financiers.” Home prices have fallen 20-25% in major cities. Goel said his bank could also raise the margin requirement by 5% in the future. “If the home prices come down by another 20%, we would think of raising the margin requirement by 5% from 15% at present,” he said.