Loan times

India is a country of first-time home loan holders. This is a natural consequence of a rapidly expanding and aspirational middle class,and of increasing urbanisation. Government policy and regulation needs to be structured to support and protect this consequence; because consumer behaviour in the real estate sector not only has disproportionate effects on the rest of the economy,but has very real social consequences,too. And part of that is to ensure that individuals and families entering into home loan contracts are helped to know exactly what theyre getting into. As this newspaper reported on Monday,the higher interest rate regime that India is in currently is causing monthly loan repayments,or EMIs,to considerably increase and,in some cases,is causing loan tenures to increase,too. If borrowers are trading off one against the other,then policymakers need to ensure they have all the necessary information to make a decision that fits in with their life-cycle income and expenditure expectations.

This isnt always a factor that banks keep in mind. A fortnight ago,for example,the Reserve Bank of India had to come down quite hard on banks who were making easy profits off prepayment penalties,which currently affect borrowers who want to refinance a home loan taken with floating interest rates. The penalties form a substantial and increasing proportion of banks profits. There are governance issues at stake here: non-discriminatory and,especially,transparent loan conditions are an essential part of a well-functioning real estate market.

Yet banks duties go beyond implementing a transparent system. They need to go the extra mile to ensure that first-time borrowers,in particular,have a clear idea of the risks and returns of alternative payment strategies,and are clear about the downside risks if the interest rate environment turns hostile. This is necessary for the security of the banking sector as well as for that of the real estate sector not to mention consumers. Currently,real estate prices have shown a steady upward trend. The time may come when they stall. If that happens,we need to ensure that banks and consumers are both prepared and fully informed.