At a time when banks are betting on the retail housing market to boost loan growth and there’s talk of teaser loans, largest private lender ICICI Bank has launched a unique home loan product which allows it to stretch eligibility criteria and tenure but by protecting itself with a third-party guarantee.
Simply put, borrowers can increase their loan amount beyond their eligibility, worked out by the bank, by 20% and even stretch the repayment tenure until the borrower reaches 67 years of age. The potential risk from the enhanced amount or the so-called “extra” 20% would be guaranteed by the Indian Mortgage Guarantee Corporation (IMGC) effectively taking the risk off ICICI Bank’s books to that extent.
The arrangement adheres to the RBI regulations as the loan-to-value ratio would still be at 80%. The borrower will have to pay a fee for the enhancement which would depend on the borrower’s age and cash flow. The maximum loan amount under this scheme would be Rs 75 lakh.
For example, if an individual wishes to borrow for purchase of a house wherein the LTV works out to Rs 75 lakh and the borrower’s eligibility as per his expected future cash flow is not more than Rs 50 lakh, the borrower can enhance the eligibility by up to 20% (Rs 60 lakh in this case) under ICICI Bank’s extra home loan scheme. The borrower also has the option of increasing the repayment period as well.
“We will not exceed the prescribed LTV,” Rajeev Sabharwal, the executive director, ICICI Bank said. The enhanced amount of up to 20% is guaranteed by IMGC, which essentially takes the risk off ICICI Bank’s books. IMGC is a joint venture between National Housing Bank (NHB), an RBI subsidiary which regulates home finance companies in India, NYSE-listed Genworth Financial, a Fortune-500 company, International Finance Corporation (IFC) and Asian Development Bank (ADB).
ICICI Bank’s home loan portfolio has been growing 25% and accounts for 55% of its total retail loan book. Banks’ retail home loans, including those classified as priority sector, stood at an outstanding Rs 6.53 lakh crore as of June end and has been growing over 15% for close to two years now.
ICICI Bank will launch three variants of the home loan targeted at middle-aged salaried individuals, self-employed and even young salaried individuals. The product will be available at bank’s branches in Greater Mumbai, NCR (National Capital Region), Bengaluru and Surat. Subsequently, it will be rolled out across other cities in the country.
Mortgage guarantees are very popular in the US but it should be noted that the resulting over-leveraged housing loans triggered the global financial crisis in 2008 and took down large corporations including Lehman Brothers.
Last week, State Bank of India had made a case for bringing back teaser home loans and chairman Arundhati Bhattacharya had argued that retail loans in India are extremely safe and banks stick to stringent due diligence.
Teaser loans are products where the interest rate is fixed for the first few years (most often at a lower level) and then subsequently migrated to floating rate which could be higher. Competing for a bigger share in the retail market, banks have launched several special schemes in home and auto loans this year. ICICI Bank had launched home loan schemes targeted at women borrowers and rural borrowers earlier this month close to the heels of a similar move by SBI.