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Will 'guarantee' drive home loans after COVID-19?

, ET Bureau|
Last Updated: May 12, 2020, 10.04 AM IST

Summary Lenders are exploring products to cover loans which are vulnerable to volatility in cash flows.

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Home loan delinquencies typically tend to show up after 3-4 years.
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KOLKATA/MUMBAI: Home loan lenders have begun exploring mortgage guarantee products as they would like to cover their loans or set of those loans which are vulnerable to volatility in cash flows as the chips are down with the economy slowing across sectors, said India Mortgage Guarantee Corporation (IMGC) chief executive Mahesh Misra.

However, there are sceptics who believe the cost structure may still be a hindrance.

Indian mortgage guarantee market remained in a nascent stage unlike in Australia, Canada or the US. Many of the lenders avoid buying the product as they believe the loan loss has been much lesser than premium till now in a market that is characterised by low default rates with borrowers having psychological attachment to their properties.

“There is a sharp step-up in interest from public sector banks and non-banking finance companies for evaluating mortgage guarantee as a mean of mitigating risk given the heightened uncertainty,” said Misra.

Guarantee products step in to facilitate unhindered credit offtake by absorbing first loss.

“Many of us were not taking mortgage guarantee products before Covid due to cost benefit gaps but now the situation is different. Earlier, our credit loss was hardly 10 basis points, hence it was not making commercial sense to buy a guarantee,” a chief executive of a smaller housing finance firm said.

Mortgage guarantee pricing takes into account expected and unexpected losses. The former is calculated basis historical data and loss assumptions. Unexpected losses typically occur due to natural disasters and/or strong economic shocks.

“IMGC has a cost attached and guarantee can be invoked only after happening of defined events. Due to competition, big NBFCs avoid it and smaller ones who give loans to the low income group segment find it extremely difficult to get any value of the product,” an industry veteran said.

Home loan delinquencies typically tend to show up after 3-4 years.

“It is premature to undertake pricing review currently. Pricing offered is basis analysis of portfolio performance and varies by lender category. We will certainly examine pricing assumptions once we have data for a credible duration,” IMGC’s Misra said, adding that product adoption is a function of lenders’ growth strategy and risk appetite. “Typically, we observe greater propensity to use guarantee products for affordable housing programmes, deeper geographies and increase in self-employed mix.”

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