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ICICI sees pre-payments on home loans

ET: ICICI Home Loan Borrowers pre-pay

ICICI Bank, the country’s second-largest mortgage lender, says it has witnessed a 15% jump in foreclosures [should be “preclosures”] following interest rate hikes, as more borrowers want to pre-pay home loans to avoid higher interest burden. The bank feels there has been a 35% decline in home sales in the past 18 months. This drop does not take into account the impact of the latest round of rate hikes.

“Unlike in the US, where foreclosure would mean borrowers sending keys to the banks, here it’s complete payment of loan before schedule. As interest rates rise, borrowers tend to go in for pre-payment,” says ICICI Bank retail asset head Rajiv Sabharwal.

(Emphasis mine.)

35% drop in sales. Uhem. Tough on the credit growth.

The second para above is interesting. So people haven’t mailed in keys yet – they can’t, as all loans in India are with recourse, meaning if the bank can’t recover the money using your house, they’ll go after your other assets.

But with real estate pricing dipping and the bust not completely in yet, are we going to see prices fall another 40% and thus, start a real foreclosure process?

Disclosure: No positions.

  • Siddharth says:

    >”ICICI Bank has hiked home loan rates twice in a little over past two months by 75 basis points. The bank is offering a floating home loan rate of 12.25% at present.”

    I tried looking for the fixed rate on their website, but very smartly they wont give any details on exact interest rates on the webpages rather ask you to call in and check with them. Also in the news as pasted above bank keeps quiet on the fixed rate changes!! I believe you have highlighted in previous post.

    On the contrary wouldnt this 15% jump be good for ICICI to show the books more ‘healthy’, at least for the present times.

  • Ninad Kunder says:

    >Hi Deepak

    I dont think a bank can go after your other assets in case of a default. The bank can posses the house and file a criminal case under section 138 for cheque bouncing.

    Indian banks havent been as indiscriminate in mortgage lending as their western counterparts and in India there is the addded buffer of the black money componenet that a individual pays for a house. That acts as additional margin on the property.

    40% drop in home prices is a different ball game, but I think RBI has done a good job at deflating the asset bubble graduallt and I dont forsee such a dramatic correction. Could happen in a few pockets but by and large we will see a gradual slide down or stagnation in property prices for sometime to come.

    Cheers

    Ninad

  • Siddharth says:

    >Ninad,
    Please see excerpt from Bloomberg

    ‘India unexpectedly appointed Duvvuri Subbarao as governor of the central bank, putting in place an economist who called raising rates the “obvious” choice to tackle the fastest inflation since 1992.’

    So basically 40% or whatever it may be, might not be impossible at all, rather I smell rat in this unexpected change in the term of Mr Reddy. Well I may be wrong as anyways his term was ending by sept 05. But guess what if he has been more aggressive on bringing down inflation (Politico’s happy!!) then IMVHO he would have gotten extension. As the case may be concerned Politico’s may have sensed something more to their favour in this new arrangement.

    I am speculating 😉
    cheers.
    P.S. If the banks can employ ‘gundas’ to harass you for EMI, I dont just think but I am SURE banks will go to any extreme make one’s life hell if one defaults! Remember only white collar (with swiss a/c’s) politicians or black marketeers with blessings from these politicians are UNTOUCHABLE’S.
    Just look at the co-op banks these recent years. Collapsing like cards, but what happens to the directors responsible for the scams? Nothing But mind if it was individual loan defaulter, he SHALL be brought to streets.
    Just my view.
    cheers

  • Deepak Shenoy says:

    >Siddharth: Good point about them not publishing rates!

    Btw, the 15% takes away the “good” loans – i.e. people who can repay with interest, but choose to prepay. That leaves a greater percentage of potential defaulters still in the pool.

    Ninad: Loans in India are full recourse. Of not jsut the primary borrower, the banks can go behind the assets of any “guarantor” as well. In fact the bank can ask for any level of asset seizure – short of your PF.

    40% correction is likely in home prices – probably even more than that – according to me. But you’re right, it may be slow and not quite as dramatic.

  • Ninad Kunder says:

    >Siddarth

    The RBI Governor’s term was anyway coming to an end and there was nothing unexpected about this. It was clear that he was not going to get a extension bcos he was not in great terms with the finance ministry and Chidambaram. The two front runner for the post were Subbarao from the finance ministry and Rakesh Mohan the Dy Governor. Subbaroa managed to get the post. I dont there is anything fishy, its part of the normal process.

    Deepak

    Let us assume that banks have full recourse. If thats the case than the banking sector is in a better of position as not only does it have recourse to a 40% depreciated house but also to other assets of the owner. Practically in the Indian legal system it is better to file a criminal case under section 138 which forces a borrower to pay up.

    Ninad

  • Deepak Shenoy says:

    >Ninad: The problem is enforcement. You can’t get a borrower to pay up very easily, even with a cheque bouncing case, because courts will link it to foreclosure eventually. And most home loans don’t take more than 5 years worth of cheques.

    Banks have a better legal position yes, but in reality it is very very time taking – it can take years to get an FC ruling.

  • Anoop says:

    >Now the question is how to avoid that. We usually don’t default on the home loan EMI but if the situation arises and you can not repay the loan , in that case how someone can protect their other assets.

    I heard about creating a trust and transfering all assets to taht trust. That might help in case of the borrower cannot play the loan due to his death or some other reasons. Is it correct?? How to dp all these things to protect our families in the worst times.

    Regards,

  • Ram says:

    >We have very bad experiance with ICICI bank.This is the time when most of banks are reducing there home loan rate, due to cut in CRR by almost 3.5% in a week.But icici has increased the home loan rate to the existing customer by almost 1%.As we heard that ICICI is trying to cover their loss from the existing customer by any means.

  • Swamy AM says:

    >This ICICI is behaving like a lender in the unorganised market. This bank is like a leach. For every slightest increase in CRR or Repo rate or Reverse Repo rate they have increased the rates and within last 1 year it increaseb by 4% for existing borrowers.

    The Account Managers give a rhetoric reply for email messages asking when the rates would be reduced. Also, they are not aware of the decisions of the Bank, even those published in financial papers like The Economic Times.

    The Government is also turning a deaf year. Last Year MRTP Commission had started investigation as to discrimination to existing and new borrowers. No news of the Commission’s investigation subsequently.

    RBI is acting as a watch dog and not as a regulator neither it had given guidelines to Banks on fair and transparent treatment to both Existing and New Customers.

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