Parekh warns against conversion of realty loans into home loans

HDFC chairman Deepak Parekh has raised concerns over possible regulatory lapses with lenders restructuring commercial real estate loans into individual home loans at a time when the Reserve Bank of India (RBI) has relaxed risk weightage on loans to commercial real estate for housing.

Parekh, who had earlier warned of a housing price bubble, said that home prices are inflated and that there are risks to the consumer as well as the banking system.

"Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period. Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her credit worthiness," he added.

"Regulators need to be vigilant and have their ear to the ground. Customers must understand the risks entailed in the products they opt for and lenders should fulfill their obligations of responsible lending.

"Red flags must be raised if schemes or products are detrimental to the system as a whole. Unhealthy business practices can infiltrate into the system due to the herd mentality instinct and business compulsions...such breeding grounds must be nipped in the bud," said Parekh.

"Construction finance should not, through any innovative structuring, be available to developers at the rate of interest being offered on individual home loans," said Parekh in his statement in HDFC' annual report.

"At the cost of perhaps now sounding like a broken record, I continue to hold the stance that increasing supply is the only way home prices can come down in India. Even in Tier II and Tier III cities, home prices are inflated," he said.

For a lender, home loans are a better credit option than construction loans. This is partly because RBI encourages home loans through lower capital requirement.

"As a basic tenet, construction finance entails higher risks and therefore such risks have to be built into the pricing. Further, complete up-fronting of construction finance to developers, even before the ground is broken, is dangerous," said Parekh.

Parekh, however, said the housing finance sector in India has never been more stable and that the future of the business is on a surer footing.

During the last fiscal, the demand and supply of individual home loans were strong against an acute shortage of housing, he said.

"Being increasingly convinced that the worst is probably behind us, the future outlook for the housing finance sector is extremely promising. Nonetheless, it is important to safeguard the housing finance market and ensure that it continues to grow in a prudent manner," he said.

In a move to boost the real estate sector, the Reserve Bank of India on Friday reduced the risk weightage on home loans and residential housing projects.

RBI has brought down the risk weightage on housing loans of up to Rs75 lakh to 50 per cent from the earlier requirement of 75 per cent and on home loans above Rs75 lakh to 75 per cent from 100 per cent.

The move is intended to help banks price loans better. However, bankers say it will be tough for them to cut home loan rates since they are already being offered at base rates, below which banks are not permitted to lend.

Risk weight to residential housing projects under commercial real estate (CRE) too has been brought down to 75 per cent from the previous requirement of 100 per cent. While the standard asset provisioning too stands reduced at 0.75 per cent compared with 1 per cent earlier.