India 15% Loan Growth Led by Cautious Buyers: Mortgages

Raghavendra Deshpande took a 20-year home loan in 2005 to buy a two-bedroom apartment in Mumbai. He plans to have it all repaid within three years.

“I don’t want to have debt for long, I want to be in control,” said Deshpande, 41, a project manager at Itek Business Solutions, who took a 1.3 million rupee ($23,921) loan for his 1.8 million rupee property. “Interest rates matter too. If I continue my loan for a longer tenure, my interest payments will be higher than the principal loan amount.”

Home loan debt, at $104 billion or 8 percent of gross domestic product, about a 10th of U.S. and European levels, will grow about 15 percent annually over the next five years, to 13 percent of GDP by March 31, 2015, according to Emkay Global Financial Services Ltd. (EMKAY), a Mumbai-based brokerage.

As Indians are drawn to financial services, technology and manufacturing jobs in cities such as Mumbai, Bangalore and New Delhi, more young professionals are cautiously borrowing to buy their homes. The loans, which average 13 years at origination, are repaid in less than five and a half, according to Housing Development Finance Corp. (HDFC), India’s biggest mortgage lender. That helps banks keep bad loans in check and expand lending, and it has driven up home prices, which led the world in gains over the past decade, almost quadrupling through the end of last year.

‘Debt Averse’

“People in India are very debt averse,” Keki M. Mistry, chief executive officer of HDFC, said in an interview in Mumbai. HDFC forecasts loan growth will expand as much as 20 percent for the next few years. The average size of a home loan at HDFC climbed 10 percent to 2.15 million rupees this year, from 1.95 million a year ago, the lender said.

India faces an urban housing shortage of 18.8 million units, according to government estimates. The shortage will lead to inadequate housing for about a quarter of the 81 million households that live in urban India, according to a report.

“India’s demographic dividend is a major driver for the mortgage finance market,” said Brian Hunsaker, a Hong Kong- based banking analyst at brokerage Keefe, Bruyette & Woods. “A relatively younger population than other geographies ensures more people will start earning in coming years or relocate, triggering demand for mortgage loans.”

This demand is prompting optimism among India’s lenders. Mortgages account for almost half of retail loans by the banking sector, according to data from the Reserve Bank of India. Mortgage loans constitute 9.3 percent, or 4.2 trillion rupees, of the total loans by banks in India as of Sept. 21, data from the central bank showed. By comparison, home loans in Singapore make up 31 percent of total advances.

Smaller Cities

India had the biggest rise in housing prices in the world in the decade to 2011, according to a study released by Lloyds TSB International in June. Prices in India grew 284 percent over the 10-year period compared to Russia’s 209 percent increase and South Africa’s 161 percent gain. China clocked a 47 percent increase, the data from Lloyds showed.

Demand is also increasing for homes in smaller Indian cities such as Bhopal and Indore in central India and Jaipur in the northwest of the country. Affordable pricing, improved availability of loans and a shift in preference from independent houses to apartments has boosted residential demand.

Small Indian cities will add 354 million square feet of homes in the next three years, according to a CRISIL Research study across 65 micro markets in 10 emerging real estate cities in India. Sale of new apartments in these markets is estimated to reach 180 billion rupees in the year ended March 31, 2012, said CRISIL, the Indian rating unit of Standard & Poor’s.

HDFC’s top five markets for retail home loans include New Delhi and its surrounding areas, Chennai, Mumbai, Bangalore and Pune, it said.

‘Smaller Cities’

“As the mortgage business penetrates into smaller cities the repayment period will keep coming down,” R. V. Verma, chairman of National Housing Bank, India’s regulator for mortgage finance companies, said in an interview. “People in smaller towns are more debt averse. This helps the mortgage finance company grow faster as they can redeploy cash again.”

Prepayments have risen 14 percent in the year ended March 31, 2012, from 12 percent a year ago after the regulators for banks and housing finance companies barred them from charging prepayment penalties, according to CRISIL Research estimates.

Home loans at State Bank of India rose 13 percent in the year to June 30 and made up 11 percent, or 1.05 trillion rupees, of its loans as of June, according to the bank. State Bank has a market share of 25.49 percent in India’s mortgage market, according to the lender.

Shares (SBIN) of State Bank of India gained more than nine times in the decade to 2011. It rose 35 percent this year compared to the benchmark Sensitive Index (SENSEX), which climbed 22 percent.

Safer Bet

Indian banks’ outstanding loans to home buyers grew by 12 percent to 3.9 trillion rupees as of March 31 from a year ago, while mortgage finance companies posted growth of 25 percent to 1.8 trillion rupees, according to Emkay Global.

“Independent mortgage finance companies will have an advantage over the banks that are trying to focus on mortgage loans,” said Hunsaker at Keefe, Bruyette & Woods. “Sector specific skills of housing finance companies will help them in keeping bad loans at check and costs under control.”

Home loans late by 90 days or more account for 1.9 percent of India’s mortgage market as of March 31, Ajay Srinivasan, director at CRISIL Research, said in an e-mailed response to Bloomberg queries. In comparison, the percent of mortgages delinquent for 90 days in the U.S. was at 6.39 in September, according to data compiled by Bloomberg.

Middle Class

“An Indian home buyer is worried about social status and that stops him from defaulting on loan repayments linked to apartments in which they are staying,” said Santosh Singh, a Mumbai-based financial services analyst at Espirito Santo Securities.

As more of India’s 1.2 billion population migrates’ to cities from villages in search of better paying jobs, the need for housing will grow. India’s middle class, in a country where about 30 percent of the country’s people are under the age of 15, is expected to reach 267 million people in 2016 from 160 million last year according to the Asian Development Bank.

Most buyers take a home loan for 10 years or more and end up repaying it within four to five years, Vikas Oberoi, chairman of Oberoi Realty Ltd. (OBER), India’s second-largest developer by value said. About 85 percent of home-loan borrowers are employed by companies, while the rest are self-employed, according to Srinivasan at CRISIL. The average age of the borrower was 35 to 36 years old.

Rates Unchanged

Banks have access to funds through deposits, where the cost of funds is as low as 4 percent, while the housing finance companies raise money through the sale of bonds or term loans at rates which are at least 300 basis points higher, said Nitin Kumar, a Mumbai-based analyst at Quant Broking Pvt.

The size of the mortgage-backed securities market is estimated at 72 billion rupees for the year ended March 31, according to CRISIL Research, based on rated transactions.

India’s central bank on Oct. 30 left interest rates unchanged at 8 percent to fight price pressures while cutting lenders’ reserve requirements to back a policy revamp by the government aimed at reviving growth.

India’s mortgage rates are among Asia’s highest at about 11 percent. Hong Kong’s average mortgage rate is about 2.15 percent, while China’s is 7.43 percent, according to Barclays Plc. Indonesian rates range from 8 percent to 10 percent while in South Korea they are about 5 percent, the bank said.

‘Sweet Spot’

When tax incentives for mortgagees are considered, the average cost of borrowing is closer to 7.1 percent, according to HDFC, the world’s most valuable independent mortgage lender.

HDFC shares have gained 21 percent this year, giving it a market value of 1.22 trillion rupees.

“India will remain a sweet spot among the global mortgage finance markets,” V. K. Sharma, chief executive at the LIC Housing Finance Ltd., the country’s second-largest mortgage finance company, said in an interview. “Increasing income levels, tax incentives, demographics and rapid urbanization will keep driving demand in this deeply underpenetrated market where asset quality remains healthy.”

To contact the reporters on this story: Pooja Thakur in Singapore at pthakur@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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