Why banks aren’t happy with mortgage loans
Banks have been very aggressive on the home loan front lately. The interest rate on home loans offered by almost all of the major banks has come down to less than 7%. In some cases, it has come down to 6.5%. Nonetheless, the question is whether lower interest rates are causing banks to do a lot of business overall, as expected.
The answer seems to be no. Take a look at the attached table. It represents additional mortgage loans granted by banks in proportion to additional loans to individuals.
The graph tells us that additional home loans as a proportion of additional personal loans decreased from May 2020, when they were 64.2%. It stood at 39.6% in August 2021, according to the latest data released yesterday.
What does it mean? The total mortgage loans granted by banks at the end of August 2020 amounted to ??13.46 trillion. Between that date and August 2021, banks granted new mortgage loans and borrowers also repaid mortgage loans they had taken out.
The reimbursement included regular reimbursement through EMIs and prepayment through one-off bulk payments. By taking the outstanding mortgage loan outstanding in August 2020, adding the new mortgage loans granted by banks over the next twelve months, and subtracting the repayments made by borrowers during the period, we get the total outstanding mortgage loans. mortgage loans from banks in August 2021.
This is located at ??14,700 billion. As a result, outstanding mortgage loans, or what banks like to call their mortgage portfolios, have increased by ??1.24 trillion between August 2020 and August 2021.
Using the same logic, we can calculate that banks’ personal loans increased by ??3.13 trillion over the same period. This means that additional home loans now account for 39.6% of overall personal lending growth, the lowest in some time. As of May 2020, they had formed 64.2%.
What does it mean? This means that despite very low mortgage interest rates, banks have not been able to push them as aggressively as they would have liked. More and more loans to individuals other than housing are being granted.
It could also mean that past home loans are being repaid at a faster rate. There is some logic to this, simply because a large part of the wealthy and upper middle class has worked and stayed at home for quite some time now. This has led to an increase in their bank balances as regular spending on various fronts has declined. Part of this balance must have been used to repay loans. Another possibility here is that the earnings from the stock market can be used to pay off home loans. When loans are repaid faster, banks need to make more loans faster to ensure that their loan portfolio also continues to grow at a faster rate. Obviously, this is not the case when it comes to home loans.
Another factor to keep in mind here is that home loans to the priority sector have contracted over the past year. This again shows the negative economic impact of the covid pandemic. Priority real estate loans now represent around 32% of the total outstanding mortgage loans from banks. They were at 38-39% at the start of 2019. Clearly, the ability of the lower echelon of society to take out and repay a mortgage has declined in recent years. Priority mortgage loans are essentially mortgage loans of up to ??35 lakh in metropolitan centers with a population of 10 lakhs and ??28 lakh otherwise. This is on the condition that the price of the house to be purchased should be up to ??45 lakh and ??30 lakh, in metropolitan and non-metropolitan areas, respectively.
All of these reasons made it so that home loans did not bring joy to banks as expected.
(Vivek Kaul is the author of Bad Money)
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