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The increase in policy rates and the impact of pass-through on overall asset quality requires closer monitoring, specifically for mortgages, according to the Financial Stability Report (FSR).
Floating rate personal/retail loans, including mortgage loans, and MSME loans given by banks are linked to their external benchmark lending rate (EBLR), which in turn is linked to the policy repo rate.
With the policy repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches) increasing by 225 basis points from 4 per cent to 6.25 per cent between May and December 2022, the EBLRs of banks have also increased by the same quantum.
The report noted that impairment in consumer credit, measured in terms of the proportion of the portfolio at 90 days past due or beyond, has shown improvement, with delinquency levels across lenders stabilising at lower levels
According to FSR, which has inputs from all the financial sector regulators, central banks around the globe aggressively tighten monetary policy, rising mortgage rates, and tighter lending standards could weigh on house prices in 2023. Housing prices have already started decelerating in major advanced and emerging economies, it added.
FSR reflects the overall evaluation of the Sub Committee of the Financial Stability and Development Council on risks to the stability of the Indian financial system. The report noted that in many economies, the ratio of housing prices to incomes is substantially higher than in past tightening cycles.
Further, financial stability may also be endangered by tightening financial conditions and ensuing losses to financial institutions due to deterioration in asset quality, which could prompt them to reduce risk and tighten lending standards.
Housing prices
The report said the all-India house price index (HPI) increased by 4.5 per cent (y-o-y) in Q2 (July-September) 2022-23 from 3.5 per cent (y-o-y) in the previous quarter. On a sequential basis, housing prices recorded a marginal increase of 0.4 per cent.
A recovery in housing prices was reflected in an upturn in housing market activity in H1 (April-September) 2022-23 in the form of a preference for investment in real estate and residential units, it added.
As a result, housing sales have increased, and new launches have further expanded, reflecting stable housing demand for both investment and end-uses. The report observed that overall, the decline in unsold inventory and strong sales momentum resulted in a lowering of inventory overhang although it varies across house sizes.
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