Vivek Kaul
I am amazed at the strong belief that people have that real estate prices will never fall. Every time I write a column on real estate readers get back to me with newer theories on why I am wrong. A new theory that was put forward(actually it is not so new, just that no one had come back to me with this theory for a while) to me on Twitter was that the government won’t allow real estate prices to fall.
To this another Twitter follower replied by saying that if real estate prices can fall in China(where the government is far bigger and has a lot more control over things than in India) then they can fall in India as well. Guess that is a fair point.
Anyway, this column is really not about why real estate prices will fall (in fact they have already started to fall). That bit I am already convinced about, I just need to keep reiterating it for the benefits of the believers who don’t see it coming.
What I am worried about is what will happen in the aftermath of home prices falling. Banks clearly have a reason to worry. And here is why.
Every month the Reserve Bank of India (RBI) puts out data regarding the sectoral deployment of credit by scheduled commercial banks operating in the country. For a period of one year ending May 29, 2015, the total lending by banks grew by 8.5% to Rs 61,51,600 crore. During the same period, the total amount of home loans given by banks grew by 17.1% to Rs 6,48,400 crore.
Now compare this to what happened during the period of one year ending May 30, 2014. The overall bank lending had grown by 12.7% to Rs 56,684,00 crore. In comparison the total amount of home loan given out by banks had grown at a similar 17% to Rs 5,53,800 crore.
If we go back a year further to May end 2013, the overall growth in bank lending had stood at 15.3% whereas home loans grew by 18.4%. (Actually the period here is a little more than a year, between May 18, 2012 and May 31, 2013).
What this clearly tells us is that even though the overall growth of lending by banks has considerably slowed down, the growth in home loan lending continues at almost the same pace. What conclusion can be draw here? The RBI does not give out the total number of home loans that banks are giving out. Neither does it tell us the average size of a home loan.
Nevertheless, one explanation for home loans continuing to grow can be that the increase in the price of homes has also led to the increase in the average size of home loans.
What happens if we look at the data a little differently? Over the one year period ending May 29, 2015, the total lending of Indian banks grew by Rs 4,83,210 crore. During the same period the total amount of home loans grew by Rs 94,590 crore. Hence, home loans constituted around 19.6% of bank lending during the last one year.
What was the scene a year back? For the one year period ending May 30, 2014, the total lending of Indian banks grew by Rs 6,40,570 crore. Home loans had grown by Rs 80,260 crore during the same period. Hence, home loans constituted 12.5% of the lending during the course of the period.
For the period of one year ending May 31, 2013, home loans constituted around 11% of the overall lending by banks. (As mentioned earlier, the period here was a little more than a year, between May 18, 2012 and May 31, 2013).
Now what does this tell us? With overall bank lending slowing down, banks have increasingly become dependent on home loans. As Deepak Shenoy of Capital Mind puts it: “the demand for housing loans is pretty much the only game in town for the banks.”
Home loans were formed 11% of the total loans given out during the period of one year ending May 2013. This number jumped to 12.5% during the period of one year ending May 2014. And for the period of one year ending May 2015, home loans amounted to 19.6% of the overall portfolio. Things get even more complicated once we look at the divide between priority sector home loans and other home loans. Home loans of up to Rs 25 lakh get categorised as priority sector loans.
For the period of one year ending May 29, 2015, priority sector home loans grew by just 4.9%. On the other hand home loans of value greater than Rs 25 lakh grew by 32.2%. Hence, higher value home loans are growing at a significantly faster rate. For the period of one year ending May 30, 2014, priority sector home loans had grown by a much faster 8.7%. The home loans greater than Rs 25 lakh had grown by around 29.1%.
The problem is that with the real estate bubble starting to loose fizz banks are likely to face the next spate of bad loans from the home loans that they have given out. I might be jumping the gun here a little, but the numbers show an increasing dependence of banks on home loans and that is clearly not a good sign.
As the analysts Saurabh Mukherjea and Sumit Shekhar of Ambit write in a recent research report titled Real Estate: The unwind and its side effects: “Over the last decade, the combined real estate portfolios of banks and NBFCs have increased at a CAGR[compounded annual growth rate] of ~20%. A breakup of this growth between value and volume shows that two-thirds of this growth has been driven by increased ticket sizes (due to the continued increase in ticket sizes), and volume growth for the sector has been relatively modest at ~8-9% CAGR over the last 10 years.”
This is going to change in the days to come. As Mukherjea and Shekhar write: “Housing finance companies/banks would be an obvious casualty if real estate prices correct.”
Disclosure: The idea for writing this column came after reading Capital Mind’s research report titled Bank NPAs Show Alarming Signs, Add to Woes of the Sector
The column originally appeared on The Daily Reckoning on July 24, 2015