Underwriting norms need to improve for cheap home loans

Indian Housing Finance Companies (HFCs) need to work on underwriting standards for affordable home loans to control credit risks, according to Moody’s. The observation becomes crucial, at a time when the government is pushing for an increase in home ownership among underprivileged groups.

Affordable housing loans — which are mortgages for low-income earners — are typically opted for by first-time home buyers, usually self-employed in small unregistered enterprises or working for small companies. Key credit considerations for HFCs while giving such loans include income assessments.

Some HFCs prefer to extend loans to the specific building projects of construction firms that they have pre-approved, Moody’s said.

The affordable housing loan market is forecast to grow to ~8 lakh crore by 2022 from ~59,300 crore in March 2015, bolstered by government measures. Affordable housing loans accounted for 14 per cent of the total home loan books of HFCs as on 31 March 2015. “This segment presents unique credit risks for lenders, and when securitised, for residential mortgage-backed securities because of the nature of the borrowers,” said Georgina Lee, assistant vice-president at Moody’s.

Many borrowers do not have previous banking transaction records and, for the self-employed, they do not disclose their incomes or file tax returns.

As such, the formal documentation or records needed to verify income and the ability to service loans is absent, similar in some ways to “low-doc” mortgage loans in other jurisdictions. The Insurance Regulatory and Development Authority of India (IRDAI) in its final norms on health regulations has said insurers can change the pricing of a health insurance product every year, three years after its launch.

Till now, product pricing could not be changed for three years.

The regulator has said that after three years, the premium can be revised by the insurer depending on the experience.

However, it said such revised rates could not be changed for a further period of at least one year from the date of the revision.

IRDAI said the premium for health insurance policies would be based on age and other relevant risk factors. The regulator also said for provision of cover under family floater, the impact of the multiple incidence of rates of all family members proposed

Key credit considerations for HFCs while giving such loans include income assessments