UTS Voice
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Currently, about half of the retail portfolios of the public sector banks come from mortgage loans made at floating rates of interest. However, the recent hardening interest rate scenario has left banks with no choice but to increase the equated monthly instalments of borrowers.
Interest rates are at a five-year high and an increase in repayment amounts has resulted in banks landing up with more defaulters as the incomes of borrowers have not kept pace with the rise. Besides mortgages, other retail credit categories such as auto and personal loans have also seen an increase in the number of defaulters.
The Indian arm of another international rating agency Fitch Ratings Ltd, in a July report said the business environment surrounding retail two wheeler financing in India ha weakened and is currently reflected in the increasing number of defaults.
A loan that’s repaid after 18’ days is now charged a 6% rate of interest of the original principal outstanding in some cases, compared with a maximum of 3.6% in 2006, “Intense competition in the segment and rural expansion has led to loose criteria for advancing loans This resulted in deterioration in the credit quality of the portfolios,” wrote Fitch Rating India associate director Peeyush Pallav in the report.
Public sector bankers say the risk is being overplayed. A general manger of a New Delhi based public sector bank said on the condition of anonymity that higher bad loans were from the accumulation of bad agricultural loans over the last five or six years or so, when farmers were unable to repay their debts due to the droughts. With a timely monsoon this year and good crops he expects the situation to change.
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