Bullish on John Bull

There has been a slow but steady growth in the volume and value of home loans disbursed over the past one year in Britain, where the mortgage market is pegged at £140 billion
(Rs 10.7 lakh crore). Arrears on home loans have fallen from 2% in 2009 to 1.7% in September 2011. The percentage of properties taken over by banks because of non-repayment of loans fell from 0.5% in 2010 to 0.4% in 2011, according to a Bank of England report released in May.

Reasons enough for India’s largest public sector bank, State Bank of India (SBI), to enter the British mortgage market. Deepak Ahuja, head, consumer banking and wealth, at SBI’s London branch, says £90 billion worth of home loans were disbursed in Britain till September. “The home loans market is likely to reach the £135 billion mark achieved last financial year [January 2010 to December 2010],” he says. The bank plans to disburse £500 million in the next fiscal.

Outside India, SBI’s biggest presence is in Britain, where it has 10 branches. Its customers are mostly nonresident Indians and people of Indian origin. The bank offers two types of housing loans. The first, called ‘buy to let’, offers between £5,000 and £1.5 million—up to 60% of the property’s value—to those buying a second home so that they can rent it. The rate of interest is 4.49%, (3.99% above the 0.5% Libor).

The second type is aimed at those buying a house for their own use. Depending on income, repaying capacity, and tenure, they are offered loans equal to 80% of the property’s cost. The equated monthly instalments can extend up to 25 years, with the rate of interest varying with loan sizes and tenure.

While SBI does not disclose the corpus it has set aside for these loans, Ahuja says funds won’t be an issue. The home loans portfolio in Britain, he adds, is in tune with SBI’s larger objective to build a community-based bank and develop long-term relationships. However, the bank will follow a “safety first’’ policy, preferring applicants with a strong credit history, and will adopt a conservative loan-to-value approach. Remortgaging property to obtain larger loans will be allowed only after a detailed scrutiny. Adds Ahuja: “Our loans are unlikely to be the cheapest as we are chasing credit quality, not volumes.”

Britain’s Financial Services Authority has laid down strict norms to avert a repeat of the subprime crisis two years ago. The revised regulations announced in 2009, called the Mortgage Market Review, cover the complete value chain, including lenders, intermediaries and consumers. Moreover, the Reserve Bank of India will be keeping an eye SBI’s use of funds.