Owning a red-tiled house with wide veranda, a small sit-out overlooking a large blooming garden ringed with cobble-stone pathway had always been one of Ms Ashwathi Menon's school girl dreams.

But the dream lay shattered as her EMI payments to the bank began to grow far faster than her modest five-figure school teacher's salary. Now, it seems that is what her dream house would remain: just another daydream.

While her other living expenses shot up, she was forced to default on her surging equated monthly instalments to the bank – for the Rs 12-lakh loan she had taken to build her house. Like millions of other lower middle class Indians, her housing loan was poised to become another red number, an NPA in the banks' balance sheet.

Win-win Situation

It had been a win-win situation for banks, customers, industry and the Government as house builders pursued their dreams at low interest rates. On the asset side, the housing loan portfolio remained a success story in banks' balance sheets as it commanded one of the lowest levels of defaults and was a very weak candidate to become a Non Performing Asset.

For the cement, steel, paints, electrical and sanitary ware industry it seemed that the demand from home builders would never end. That was until inflation hit the economy hard. As interest rates spiralled literally out of control, there were more defaults and NPAs for banks began to mount.

For the four years between 2003-04 and 2007-08, the housing loan disbursal by banks grew by as much as 35-40 per cent. It had more than doubled in 2004-05. But, as inflation strengthened its grip on the economy, demand for housing loans fell to less than half by 2008-09. RBI statistics show that this was also the period when housing NPAs as a percentage of housing loans began to rise.

In an effort to clamp down on “excessive loans” to real estate by banks, the RBI strengthened its regulations and ensured that banks would not lend more than 80 per cent of the value of the property for loans of over Rs 20 lakh and 90 per cent for loans below Rs 20 lakh. The apex bank also enhanced the provisioning norms for loans to builders from 0.4 per cent to two per cent in November 2010.

Surge and Fall

Growth in housing loans promptly fell to single digit levels after a long gap while housing NPA as a percentage of housing loans moderated, although still remained high. And, the growth rate has been tepid ever since. The happy days for banks seemed to be over. Home dreams of a large number of people lay shattered while banks were left with red blotches on their balance sheets. But the clamp down by the RBI and the fall in housing loan disbursal had its happy tidings as well.

The potential defaults and NPA in the housing sector would have been much higher if the RBI had not clamped down in time. Only the brave and deep pocketed customers would have entered into the housing loan markets. But for the thousands of erstwhile housing loan customers with their blemished repayment track records, it was a different story.

The impact was beginning to be felt across sectors. The top-line of steel, cement, electrical appliance, sanitary ware and paint companies began head south even as their profits declined. With lower offtake of loans, high rates and thinning margins, the banking sector also started reporting poor results. It was bad times for the stock market as well.

Surging EMI

Take the case of Ms Ashwathy. She had considered herself very lucky a few years ago when she was able to take a home loan at the rock-bottom interest rate of 7.5 per cent per annum. The EMI for her Rs 12 lakh housing loan under a 25-year tenure was just Rs 8,868 per month. But her luck ran out.

Under a directive from the RBI, her bank scrapped teaser home loans which had offered ridiculously low interest rates. Her account was placed in the floating rate category and the EMI just kept going up. Today she pays an interest rate of 11.5 per cent for her housing loan, pushing her EMI to Rs 12,198 a steep climb of over 37 per cent in a span of just three years, something that she is still unable to come to terms with.

Multiplier Effect

The high rates of inflation and EMI payments have not only begun to hurt the consumer but the Government as well. Housing, a stimulant for various sectors of the economy, constitutes a very small percentage of GDP in India. It was just 3.4 per cent of the GDP in 2001 but shot up to 6.1 per cent in 2006 and accounted for seven per cent in 2007.

It has stagnated at that level ever since. The multiplier effect is gone. Meanwhile mortgage market constitutes 12 per cent of the GDP of China, 22 per cent in Malaysia, 40 per cent and 65 per cent in the US.

Ms Aswathy might be exhausted but she is not defeated. She is fighting hard to make sure her loan does not turn into a non performing asset. Astute and timely intervention from the Government could keep her home dreams alive.

cj@thehindu.co.in