Meanwhile, a higher mortgage rate has also reduced a home buyer’s eligibility to borrow. At ICICI Bank, a home buyer is now able to borrow 5-10% less than what he could have a year ago with same level of income. So while home prices have gone up in a year, a person’s ability to buy a home has actually gone down. Thus, one could now afford only a smaller home than what he could have got a year ago. Besides, ICICI Bank is now focusing on lending to end-users and not investors. “If you have bought a house to live in, you are more likely to continue paying EMIs even though interest rates go up,” says Mr Sabharwal, indicating that investors were more likely to default. Much of the investors have already exited or are on their way out from the real estate sector given the downturn, which is unlikely to give them any significant return.

ICICI Bank, the country’s second-largest mortgage lender, says it has witnessed a 15% jump in the number of people pre-paying their home loans to avoid higher EMIs .The bank feels there has been a 35% decline in home sales in the past 18 months. This drop does not take into account the impact of the latest round of rate hikes. “Unlike in the US, where foreclosure would mean borrowers sending keys to the banks, here it’s complete payment of loan before schedule. As interest rates rise, borrowers tend to go in for pre-payment,” says Rajiv Sabharwal.

ICICI Bank has hiked home loan rates twice in a little over past two months by 75 basis points. The bank is offering a floating home loan rate of 12.25% at present. A higher mortgage rate has also reduced a home buyer’s eligibility to borrow. At ICICI Bank, a home buyer is now able to borrow 5-10% less than what he could have a year ago with same level of income. So while home prices have gone up in a year, a person’s ability to buy a home has actually gone down. Thus, one could now afford only a smaller home than what he could have got a year ago. Besides, ICICI Bank is now focusing on lending to end-users and not investors. “If you have bought a house to live in, you are more likely to continue paying EMIs even though interest rates go up,” says Mr Sabharwal, indicating that investors were more likely to default. Much of the investors have already exited or are on their way out from the real estate sector given the downturn, which is unlikely to give them any significant return.

Reliance Capital also runs India’s largest asset management firm, a stock brokerage and insurance businesses.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank, says, “The instances where 85-90% of the price of the property was given as loan have drastically reduced and the average is around 75-80% now for home loans. We have always been keeping our LTV’s (loan to value) below these current average levels.” Even the public sector banks, which are already stricter with their margins, are also likely to increase the borrower’s share. An Indian Bank official told DNA, “We had been financing 85% [of the actual value] and continue to do so. But we may look at increasing the margin levels.”

However, the largest home financer in the country, ICICI Bank, which provides loans under its subsidiary ICICI Home Finance, plans to stick to current margin levels. Rajiv Sabharwal, senior general manager, retail assets at ICICI Bank, says: “We have been giving out 85% of the value for the past two years. We have never given 90-97%. As long as the valuation is done well, 85% is a good figure. We have an in-house valuation expert and we are comfortable with 85%. A genuine buyer would need that kind of financing to buy a house.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank, says, “The instances where 85-90% of the price of the property was given as loan have drastically reduced and the average is around 75-80% now for home loans. We have always been keeping our LTV’s (loan to value) below these current average levels.” Even the public sector banks, which are already stricter with their margins, are also likely to increase the borrower’s share. An Indian Bank official told DNA, “We had been financing 85% [of the actual value] and continue to do so. But we may look at increasing the margin levels.”

However, the largest home financer in the country, ICICI Bank, which provides loans under its subsidiary ICICI Home Finance, plans to stick to current margin levels. Rajiv Sabharwal, senior general manager, retail assets at ICICI Bank, says: “We have been giving out 85% of the value for the past two years. We have never given 90-97%. As long as the valuation is done well, 85% is a good figure. We have an in-house valuation expert and we are comfortable with 85%. A genuine buyer would need that kind of financing to buy a house.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank, says, “The instances where 85-90% of the price of the property was given as loan have drastically reduced and the average is around 75-80% now for home loans. We have always been keeping our LTV’s (loan to value) below these current average levels.” Even the public sector banks, which are already stricter with their margins, are also likely to increase the borrower’s share. An Indian Bank official told DNA, “We had been financing 85% [of the actual value] and continue to do so. But we may look at increasing the margin levels.”

However, the largest home financer in the country, ICICI Bank, which provides loans under its subsidiary ICICI Home Finance, plans to stick to current margin levels. Rajiv Sabharwal, senior general manager, retail assets at ICICI Bank, says: “We have been giving out 85% of the value for the past two years. We have never given 90-97%. As long as the valuation is done well, 85% is a good figure. We have an in-house valuation expert and we are comfortable with 85%. A genuine buyer would need that kind of financing to buy a house.

Speaking at a function in Ghaziabad on Monday, State Bank Chairman-cum-Managing Director O P Bhatt said the bank has decided to raise the interest rate by 0.5 per cent on all loans such as home loans and auto loans which are linked to PLR.

The revision in PLR came after SBI raised its PLR from 12.25 per cent to 12.75 per cent last week following Reserve Bank’s increasing its key short-term lending rate to banks and the mandatory cash deposits that banks need to keep with the apex bank (CRR) by 0.5 per cent each.

Referring to the impact on bank’s profit margins, Bhatt he hoped to maintain the net interest margin at 3 per cent this fiscal.

SBI had earlier announced to hike interest rate on fixed deposit rates by up to 75 basis points effective from June 30.

State Bank of India in which government has about 60 per cent stake is targeting 40 per cent growth in non-interest income in 2008-09, compared to 28 per cent last fiscal.

The bank had lowered its PLR twice in February to 12.25 per cent but decided to raise by 50 basis points last week.

“The net profit of the bank is likely to be affected next quarter though there is not much on first quarter profits ending today,” he said.

He also indicated the bank is expected to set aside at least 10 billion dollars (232.8 million) to provide for depreciation in its treasury portfolio as interest rate rise.

Besides increasing the lending rates, some banks have asked the promoters to increase their share in project funding in an attempt to mitigate the associated risks.

The economic uncertainty and runaway inflation is likely to impact the real estate prices, and this is already evident in some pockets in Mumbai. The decline indicates tough times ahead for the real estate industry, according to bankers. Banks have already turned selective in taking up new funding proposals.

Corporation Bank chief general manager M Narendra said the situation in the real estate sector will be different from last year. There will be a correction, he asserted.

The Reserve Bank of India has already declared the real estate space as a sensitive sector under its prudential norms. The sector thereby attracts higher risk weightage (banks have to set aside higher amount of capital for real estate exposure) and the lending is closely monitored.

A senior executive with Dena Bank, said, “Banks do not stop taking exposure just because the outlook for a particular sector is bad. Some players are competitive and remain ahead of others”. Bank of India is not entertaining any new proposals from real estate sector since last year, according to executive director G S Vedi.

However, there is no 100 per cent ban on extending credit to the existing clients.

Banks are also asking for higher contribution from the promoters and developers in a move to secure their position. For example, banks are asking for a hike in the contribution from 25 per cent to 30 per cent, a senior State Bank of India executive said. Hence, the promoters have a higher stake in project completion and loan payment. Keeping with the rising cost of funds and the need for additional capital for risky assets, the banks have increased the lending rates for real estate projects.

The real estate companies are now paying prime lending rates (PLR) for new projects. The PLRs of most public sector banks is in the band of 12.25 to 12.75 per cent. A year ago, lending was done at a PLR below 10 per cent rate, said the Dena bank executive.

According to Reserve Bank of India data, the banking sector gave Rs 53,897 crore to the real estate sector as on February 15, 2008. The year-on-year growth in credit deployment was 26.7 per cent (Rs 17,361 crore) as against 79 per cent (Rs 18,770 crore) a year ago.

The growth in loans to commercial real estate remained high, notwithstanding some moderation, RBI said in its macro-economy report for 2007-08.

The central bank issued notification yesterday in pursuance of the annual credit policy announcement made by the Reserve Bank Governor Y V Reddy on April 29.

Earlier on May 15, the Central Bank had relaxed the risk provisioning norms for housing advances by the commercial banks. “It has been decided to enhance the limit of Rs 20 lakh to Rs 30 lakh in respect of bank loans for housing in terms of applicability of risk weights for capital adequacy purposes. Accordingly, such loans will carry a risk weight of 50 per cent,” Reddy had said.

The move would provide the urban cooperative banks additional capital for lending more to housing sector. For banks, the amount of capital they are required to set aside for each loan is decided by minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank’s net worth to its risk-weighted credit.

According to the analysts, the RBI has modified the provisioning limit for housing loan to take care of the growing property rates mainly in the urban centers.

The risk provisioning earlier was 75 per cent of the loan value between Rs 20-30 lakh. For loans exceeding Rs 30 lakh for purchase of residential property, the banks would have to make a risk provision on 75 per cent of the loan amount.