Demand soars for bank loans against property

Cautious banks lend only 50-60% of market value.

Source : BL:Priya Nair:S. Shanker:Mumbai, Dec. 27.2010

Encouraged by the growing demand for loans against property as collateral, banks are trying to revive this business.

But they are guarded, want to avoid the risk of over-valuation.

They lend not more than 50 per cent of the market value of the property and that too at 2-3 percentage points higher than the normal home loan rate of interest.

The demand is prompting banks to look at reviving this product, which was earlier beset by problems of fake documents and excessive valuation.

The demand for such loans is coming mainly from micro, small and medium entrepreneurs, and are typically in the range of Rs 5-10 lakh.

Borrowing against property usually happens only when the borrower has exhausted most other sources of funds, said an SBI official.

Mr R. Sampath, General Manager, Retail Banking, Bank of India, said: "We are reviving loan against property for our existing customers. These are businessmen whose annual turnover is in the range of Rs 30-40 lakh.

They usually don't have regular cash flows and may not have audited balance-sheets. In such cases, we go by their income-tax statements."

BoI's loan against property portfolio is Rs 1,535 crore.

Banks insist on a higher margin for such loans, that is, they will give only 50-60 per cent of the value of the property as loan. (For a normal home loan, banks give 80-90 per cent of the property value as loan.)

These loans are normally given for no more than three years as real estate prices can see correction of 20-25 per cent and banks do not want to be saddled with a property whose value has declined considerably, said the senior SBI official.

"The interest rates are slightly higher than home loan rates, but lower than unsecured personal loans, as in this case there is collateral," the official said.

Flagship products

Mr Uday Sareen, Head, Retail Banking, ING Vysya Bank, said: "Our loan against property is turning out to be one of our flagship products. About one third of our incremental home loans are loans against property. Even salaried professionals take loans against property."

While there have been instances of delays in repayment, cases of defaults are few as the property acts as a security, and the fear of losing the property ensures that the borrower services the loan, Mr Sareen said.

Central Bank of India is looking at a special product for educational institutions, as there is good demand from institutes planning to expand, said a senior official from the bank. Educational institutes have money by way of capitation fees, but face problems when it comes to regular cash flows, he said.

On banks insisting on higher margins for loans against property, Mr Anand J. Gupta of the Builders Association of India, said that while the note of caution by the central bank is understandable, nowhere has the RBI said that banks should give only 50 per cent of the property value or charge higher interest, he said.

Property prices are a function of demand and supply - market forces - and it is known that there is no better mortgage than that on property in terms of security. It is also known that the default rate on property loans is very low.