SBI

The RBI rate cut won’t revive the real estate sector; lower home prices will

ARTS RAJAN
I don’t know what you want to call me, Santa Claus or hawk. My name is Raghuram Rajan and I do what I do – Raghuram Rajan, governor of the Reserve Bank of India, yesterday in a press conference

During the course of the last few weeks, anyone who had any opinion on the Indian economy was saying just one thing: “Raghuram Rajan should cut interest rates.” Given this, there was tremendous pressure on Rajan to cut the repo rate, or the rate at which the Reserve Bank of India (RBI) lends to banks.
The expectation was that Rajan would cut the repo rate by 25 basis points. One basis point is one hundredth of a percentage. He surprised everyone by cutting the repo rate by 50 basis points to 6.75%.

Or as a Facebook friend put it quoting Akshay Kumar from the movie Rowdy Rathore: “Main jo bolta hoon woh main karta hoon. Aur jo main nahin bolta hoon, woh main definitely karta hoon (I do what I say. And what I don’t say I definitely do that).”

One of the first reactions that came in on the rate cut was from Rajeev Talwar, co-CEO of DLF, India’s largest listed real estate company. Talwar said that a 50 basis points rate cut was a “pleasant surprise” from the RBI governor. He also suggested that now that the governor had “bitten the bullet”, it is time he allowed “teaser home loans…at least for a period of two years” and that would “give a huge boost to new buyers”.

The insinuation here is that high interest rates had kept people away from buying homes. Nevertheless, is that really true? Let’s take a look at what the numbers suggest. The RBI publishes the sectoral deployment of credit data every month. As per this data, the overall lending by banks grew by 8.2% between July 25, 2014 and July 24, 2015. During the same period the total amount of home loans given by banks grew by 17.8%.

How was the scene in July 2014? Between July 26, 2013 and July 25, 2014, the overall lending by banks had grown at a much faster 12.6%. During the same period home loans grew by 17.4%.

What do these data points tell us? While the overall lending growth of banks has come down, the home loans have grown at a faster rate, despite high interest rates. Further, during the last one year, 21.6% of overall lending by banks was in the form of home loans. This number had stood at 13.2% between July 2013 and July 2014.

Hence, Talwar insinuating that the real estate sector has been down in the dumps because of high interest rates, is basically all bunkum. Take the case of the State Bank of India, the largest bank in the country. Between June 30, 2014 and June 30, 2015, home loans formed around 36% of all the domestic lending carried out by the bank. And this is a huge number.

If builders had their way, they would happily turn all Indian banks into home finance companies. But the fact of the matter is that banks are already giving out a substantial portion of their overall lending as home loans.

If real estate companies are still not managing to sell enough homes and have managed to accumulate a huge amount of inventory of unsold homes, high interest rates are not responsible for it in anyway. The home loan lending by banks hasn’t slowed down one bit and continues to grow at a good pace.

The only way to revive the real estate is to cut prices. But that is something that the builders don’t want to do, having gotten used to easy money in the form of high prices over the years. Hence, they keep blaming everyone but themselves.

As Navin Raheja, chairman and managing director of Raheja Developers recently said: “I don’t think there is any further possibility of developers to reduce the price further because there is no way they can reduce the prices…If you look at it, last 10 years, there have been so many new developers which came without knowing the dynamics of the sector and later on they went into distress selling.” I sincerely wonder where this so called “distress selling” is happening, a few projects here and there notwithstanding.

The larger point here is that this sort of attitude will only hurt real estate developers in the time to come. They want to sell stuff at a price at which most people can’t afford to buy. A recent study by real estate consultant JLL points out that 69% of the unsold homes in Mumbai are priced more than Rs 1 crore. This when the weighted average price of a home in the city is around Rs 1.3 crore.

The real estate developers have refused to look at this basic fact and continue to price homes at high rates. Data from JLL shows that of the new launches that happened in Mumbai between April and June 2015, only 3.2% of the homes being built were priced between Rs 31-65 lakh. There were none under Rs 30 lakh.

As I have often pointed, the impact that falling interest rates have on EMIs isn’t huge. A  home loan of Rs 50 lakh, at an interest rate of 10% and a tenure of 20 years, leads to an EMI of Rs 48,251. At 9.5%, assuming the fifty basis point repo rate cut is passed on to the borrower, the EMI works out to around Rs 46,607, which is around Rs 1,650 lower.

No one is going to go buy a house with a loan of Rs 50 lakh, because the EMI is now Rs 1,650 lower. Also, in order to get a home loan of Rs 50 lakh, the individual interested in buying a home would need to arrange Rs 12.5 lakh for a down-payment (assuming an optimistic ratio of 80:20). Over and above this, some portion of the payment will have to be made in black as well.

What all this clearly tells us that most of what is being built by real estate developers will continue to remain unsold. The real estate developers have priced themselves out of the market. The sooner they come around to this reality, the better it will be for all of us.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Sep 30, 2015

Why the State Bank of India is in love with home loans

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In yesterday’s edition of The Daily Reckoning, I had discussed why teaser rate home loans are a bad idea. Arundhati Bhattacharya, the chairperson of the State Bank of India (SBI), recently put forward the idea that the country’s largest bank should be allowed to launch teaser rate home loans.

As I had explained yesterday, teaser home loans are essentially home loans in which the interest rate is fixed in the initial years and is lower than the normal floating interest rate on a home loan. The lower interest rate is limited only to the first two-three years after which the loan is priced at the prevailing interest rate on home loans.

The question is, why does Bhattacharya want to launch teaser rate home loans? Let’s look at some numbers of SBI. As on June 30, 2015, the bank had given out home loans worth Rs 1,63,678 crore, having grown by a robust 13.5% since June 30, 2014.This, when the overall domestic lending grew by a much slower 5.38%.

Between June 30, 2014 and June 30, 2015, the bank gave out home loans worth Rs 19,468 crore. Where did the overall lending stand at? The total domestic lending of the bank grew by Rs 54,255 crore during the same period. Hence, home loans formed a massive 35.9% of the total lending that SBI has done within India, between June 2014 and June 2015.

To rephrase the earlier sentence, more than one third of all domestic lending of SBI, over the last one year, has been in the form of home loans. For a diversified bank, which is not just a home loan company, this skew is way too pronounced.

Nevertheless, even after this, why does Bhattacharya want to give out more home loans, by launching teaser rate home loans? In order to answer this question I would need the average home loan size of SBI. I found two newsreports, which gave me two very different numbers. One report published in October 2014, quoted a senior SBI executive said that the average home loan size in case of SBI was at Rs 30-32 lakh. Another report published in April 2015 said that the average home loan size in case of SBI was at Rs 20 lakh.

The second number seems to me more believable given that the average home loan size of HDFC is Rs 23.4 lakh (HDFC shares its average home loan size every quarter). My guess is that the average home loan size of SBI would be a little lower than that of HDFC, given its better reach.

So we will work with an average home loan size of Rs 20 lakh. The next number needed is that home loan to value ratio, at the time the loan is given out. I couldn’t find that number for SBI (dear reader, hope you understand how difficult it is to get numbers on anything in India, despite the improvement over the years).

The number in case of HDFC is 65%. What this means is that on an average HDFC gives 65% of the market value of a home being bought, as a home loan.  If we work with this number, the average market price of a home that SBI is giving a loan against is around Rs 31 lakh (Rs 20 lakh divided by 0.65). But this does not take one factor into account.

Almost no real estate deal in India is carried out totally in white money. There is a portion of black money that inevitably needs to be paid. It is very difficult to arrive at an all India number, but my guess is that 75:25 is a good conservative ratio to work with. This means that 75% of the value of the home is paid in white and the remaining in black.

Once this factor is taken into account the market price against which a home loan is given, shoots up to around Rs 41 lakh (Rs 31 lakh divided by 0.75). What does this mean? This means that the loan to value ratio is a little under 50% (Rs 20 lakh expressed as a percentage of Rs 41 lakh).

Hence, giving out home loans is a very safe form of lending. In fact, it is the safest form of lending. For mid-level companies, bad loans were at 10.3%. So for every Rs 100 that SBI gave as loans to mid-level companies, a little over Rs 10 wasn’t repaid.

For, retail loans the bad loans were at 1.17%. The bank does not give a separate number for home loans. Auto loans, education loans and personal loans, are the other forms of retail loans. The default rates in case of these loans is likely to be higher. Hence, the bad loans case of home loans should be lower than 1.17%.

The bad loans in case of HDFC amount to 0.54% of the total loans. What this means clearly is that almost no one who takes on a home loan defaults on it. Given this, it is not surprising that Bhattacharya wants to be allowed to launch teaser rate home loans. It is better for her to do that than be lending to corporates. As Bhattacharya had said: “This is one portfolio where NPAs are the lowest.”

The fundamental problem with teaser rate home loans is that a bank cannot be allowed to give out a loan at a rate of interest lower than its base rate or the minimum interest rate a bank charges its customers. Also, they cannot really be compared to normal home loans, given that the chances of the EMI jumping up in the years to come is significantly higher in case of teaser home loans. And that is a risk that Bhattacharya probably hasn’t taken into account.

The column originally appeared on The Daily Reckoning on August 27, 2015

Cheaper EMI? Why all the hullabaloo around bank rate cuts is a bad joke

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Vivek Kaul

In the press conference that followed yesterday’s monetary policy, Raghuram Rajan, the governor of the Reserve Bank of India(RBI), said: “Banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen.”
What Rajan meant here was that banks are able to raise deposits at a much lower interest rate than they had in the past. Given this, banks should be cutting the interest rates they charge on their loans.
Banks have been saying for a while that they can’t cut their lending rates because interest rates they pay on their deposits and other forms of borrowing continue to remain high. Rajan essentially said that this argument was basically “nonsense”.
Banks got the message immediately and by the end of the day three big banks, State Bank of India (SBI), HDFC Bank, and ICICI Bank, cut their base rates or the minimum rate of interest they charge to their customers.
Both SBI and HDFC Bank cut their base rate by 15 basis points (one basis point is one hundredth of a percentage) to 9.85%. ICICI Bank was a little more aggressive and cut its base rate by 25 basis points to 9.75%.
These base rate cuts have got the media very excited. Here are some of the headlines. The Times of India says: “Top 3 Banks cut lending rates after Rajan push”. The Economic Times reports: “RBI doesn’t cut rates but forces others to do so”. The normally sedate Business Standard says: “Banks bow to RBI pressure”.
The question is will these base rate cuts really make any difference? Theoretically people are supposed to borrow more at lower interest rates. But is that really the case? Let’s run some numbers here.
For males, SBI offers a car loan at 45 basis points above its base rate. Hence, when the base rate is 10%, the car loan is available at 10.45%. When the base rate is at 9.85%, the car loan will be available at 10.30%. (For females the car loan is available at 40 basis points above the base rate).
Let’s consider a male who takes a car loan of Rs 3 lakh repayable over a period of 5 years.
The EMI at 10.45% would work out to Rs 6,440.74. The EMI at 10.3% works out to Rs 6,418.49 or Rs 22.25 lower.
So, is someone going to buy a car just because his EMI is lower by Rs 22? None of the newspapers which have run extremely detailed stories around the base rate cuts, have bothered to ask this basic question.
What about home loans? Home loans have a much larger ticket size than car loans, so shouldn’t the difference in EMIs there be huge? Let’s see.
Data from the National Housing Bank shows that the average home loan size in India in 2013-2014 stood at Rs 18-19 lakh. Let’s round it off to Rs 20 lakh, given that we are now in 2015-2016. For males, SBI offers a home loan at 15 basis points above its base rate (for females the home loan is available at 10 basis points above the base rate).
When the base rate was at 10%, the interest charged on a home loan to a male would be 10.15%. At a base rate of 9.85%, the interest rate charged on a home loan to a male would be 10%. Let’s consider a male who takes a home loan of Rs 20 lakh, repayable over a period of 20 years.
At 10.15% his EMI works out to Rs 19,499.62. At 10%, it is Rs 19,300.43 or Rs 199.18, lower. So is an individual going to buy a home because his EMI is will now be lower by Rs 199?
What if the loan size were bigger. Let’s say around Rs 60 lakh. How do things look then? In this case the EMI difference comes to around Rs 597.55. So, someone who can afford a home loan of Rs 60 lakh is definitely not going to be impacted by such a low amount. As I have often said in the past, in case of real estate, interest rates and EMIs are really not the problem. The problem is simply the price of homes. They have gone way beyond what most people can afford. And unless there is a correction there, no amount of rate cuts by banks is going to revive buying. This is a simple fact that everyone who makes a living through the real estate industry needs to realize.
What these calculations also tell us is that the impact interest rates have on consumption is terribly overrated. The media spends too much time analysing will the RBI cut the repo rate(I am guilty of the same). Then it spends even more time analysing whether banks will pass on the cut to their consumers. If banks do not pass on the cut it spends time on analysing why banks are not passing on the cut. It would do a whole lot of us more good if the ‘good’ journalists who cover banking start using the PMT function on MS Excel. (This function essentially helps calculate the EMI on a loan).
The issue is whether a minuscule base rate cut really makes a difference? And the answer as I have shown from the calculations above is, it does not. What makes a difference is basically how confident is the consumer feeling about the future. In India, we really do not measure this properly. The Consumer Confidence Survey carried out by the RBI “provides an assessment of the perception of respondents spread across six metropolitan cities viz., Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi.” Given that it has limited use.
To conclude, it is best to quote something that the economist John Kenneth Galbraith wrote in The Affluent Society: “There is no magic in the monetary policy… It survives in esteem partly because so few understand it.” And that indeed will be the way how thing shall continue.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on Apr 8, 2015