Banks dither in lending to GenX

Young borrowers are main defaulters in housing loan segment, finds out Banks are not happy with the experience they have with young borrowers (aged between 20 and 30) as they are both aspiring and 'unruly'.

Young borrowers have become main defaulters, especially in the housing loan segment. Banks are facing the highest increase in default in the home loans and are beginning to feel the "bite" after growing their portfolio at a breakneck pace over the last three years.

O.P. Bhatt, Chairman, State Bank of India, says the capacity of Indian banks to identify the price risk is not adequate and in many cases, absent.

Youngsters, who are just into the job market want a house loan, besides furnishing finance. Nothing wrong with the aspirations themselves, it is just that the lending has to be repaid. Most of the youngsters forget this and many of them, especially those employed in the BPO and IT companies disappear after taking a loan - shifting jobs, residence and of course, changing mobile numbers too. It become very difficult for the branch managers and field officials to trace locations and it proves a costly exercise to go after them.

Outstanding of home loans in banking sector Year on Year growth
March 31, 2005 Rs, 1,34,276 crore 50 per cent
March 31. 2006 Rs. 1,79,116 crore 34 per cent
March 21. 2007 Rs. 2,43,000 crore 33 per cent

Manmohan Huria, a retired IAS officer from Punjab, cautions that it would not be fair to generalise that everyone in this segment is a bad risk.

Some borrowers in this age group do find themselves over-leveraged, Huria adds. The onus is on the banks to give credit to this segment in smaller doses if they discipline credit.

It is for the banks to observe all due diligence practices. Earlier, it was the banks that were giving loans to young borrowers, by including the income of parents, just to boost the housing loan portfolio.

Now, a sizeable number of private and public sector banks have decided not to give loans to those less than 25 years of age as there is a significant change in borrower behaviour between the age of 26 and 28. Despite the reduction the rate of interest and number of new schemes being floated by the banks - housing loans are not picking up. Home loan growth is expected to fall to 15 per cent after two years of robust 33-35 per cent growth.

Finance experts as a thumb rule advise that home loan repayments should be restricted to 30 per cent of borrowers monthly income. Any temporary job loss or unexpected expenditure in such a case could make financial situation miserable. Often age plays an important role in the final decision. And if any one has to fulfil the aspiration, what is needed is to do is to go for home loan well before retirement.

Banking industry sources have for the time being cautioned that a combination of rising interest rates, high cost of real estate and higher margins in bank loans would slow down the growth in home loan portfolio. Even now the RBI is not at all interested in bringing down the interest rate on housing loans but banks on their own are deciding to lower the interest rate because of the competition.

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