Why rate hikes unlikely to impact asset quality of home loan portfolios – rating agency ICRA explains

The ongoing rate hikes are unlikely to impact repayments by home loan borrowers despite an increase in the monthly instalments, a rating agency said on Tuesday.

Mortgage lenders have limited headroom to extend the loan tenures given the fact that the prime home loan segment already has long tenures, and a further extension in loan tenures will lead to overall tenures extending beyond the working life of the borrower, rating agency Icra said.

As a result, equated monthly instalments (EMIs) will go up by 12-21 per cent for prime home loans, while the same will go up by 8-13 per cent in the case of the affordable home loan segment, its sector head for financial sector ratings Manushree Saggar said.

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"While there is an expectation of a further increase in interest rates, lenders have limited headroom to increase loan tenures; thus, EMIs would have to be revised upwards. However, this is unlikely to impact the HFCs asset quality indicators significantly," Saggar said.

Even with revised EMIs, the fixed obligation to income ratio (FOIR) is expected to increase by less than 10 percentage points and hence remain manageable, unless the original loans were given at aggressive FOIRs, she added.

It can be noted that the Reserve Bank has hiked rates by 1.90 per cent since May this year in response to the runaway inflation, which has been transmitted into rates paid by home borrowers as well.

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Icra said the increase in FOIRs could also be partly offset by the expected increase in income levels with the improvement in the operating environment.

The asset quality for home loans benefits from the fact that home loan EMIs get priority over other obligations as loans are mostly taken for self-occupied houses, it added.

Additionally, lenders may not pass on the entire increase to the end borrowers given the competitive market space and thus, the impact on EMIs could be further limited, it said, pointing out that housing finance companies have increased the lending rates by about 0.50-1 per cent in H1 FY2023 compared to the 1.90 per cent hike in benchmark repo rates.

Some lenders might follow a mixed approach of changing both EMI and tenures to manage the monthly debt burden of borrowers, which can result in better repayment rates.