What Do We Know About The Moratorium Opted Home Loan Customers?

The Reserve Bank of India in its Covid-19 regulatory package announced moratorium on monthly instalments for 3 months, applicable on all term loans. This 3-month moratorium period was further extended by additional 3 months, taking the total moratorium period to 6 months.  

Analysing the moratorium opt-in data of home loan customers in the first two months of forbearance announcement, throws light on some interesting trends and developments.

The data analysed for this purpose is for around 50,000 home loans, amounting to roughly INR 8500 crore. This data represents public sector banks, private banks, housing finance companies and pure play affordable housing companies. The moratorium opt-in rates were found to be similar on an aggregate basis, as well as across various credit parameters, when the pool was compared with individual lender overall portfolio opt-in rates. This means that portion of large lenders opt-in rates in pool were compared with large lender’s aggregate book opt-in rates and were found to be similar and so forth for mid-small and affordable housing players.

Let me hit the road straight by providing you with the broad highlights of our analysis:

Opt-in rates are steadily increasing with time 

Average mortarium opt-in rate was 32% in March ’20, which increased to - 42% in April’20, though the jump was not uniform across lenders. The lower initial opt-in in March saw a significant uptick across all lenders and all categories of lenders. This could be attributed to lack of awareness, logistical issues faced by the borrowers or due to slow sink in of the fear of job loss or business slowdown. We also heard some lenders say that when they informed their borrowers about the payment of interest on pending EMIs over the balance life of the loan, many reversed their decision in the same month or subsequent month. Does that show-up in this data? The numbers would have been worse otherwise in April?

What surprised us more about this data point was that the opt in rate in USA & Australia, based on our shareholders business in those countries was merely ~11% & 7.3% respectively. Are borrowers in India more aware of their consumer rights than their western counterparts or are they ignorant about the interest on interest payment on account of the moratorium or that they are more awry about their near term future than their counterparts in global markets.

Now that moratorium has been extended for another 3 months; it will be interesting to watch whether the opt-in rate goes up from here or comes down. The trends will surely answer many questions.

Opt-in rates are significantly lower for large lenders as compared to small and medium size lenders.

Intuitively, this could be on account of lower interest rates and the segment of customers catered by large lenders. Irrespective of the loan amount, large lenders cater to more formal salaried and non-salaried segment. Globally, this segment has higher ability to absorb market volatility. Though this may change with another 3 months extension now that many corporate are making massive job cuts.

Affordable housing borrowers have significantly higher opt-ins compared to prime segment borrowers. 

The opt-in rates among affordable housing borrowers are significantly higher compared to prime segment borrowers. This seems to be in line with expectations. Affordable segment borrowers have relatively lower income and therefore their savings are lower, which translates into lower ability to deal with financial shocks. Are they already in a financial cash crunch or is it a result of anticipated future income changes? In which case it was a smart decision by these affordable housing borrowers. It may be pertinent to mention here that opt-in rates of PMAY and Non-PMAY loans are surprisingly similar. 

Younger borrowers have opted-in more than older borrowers. Borrowers in the age bracket of <25 have opted more than those in 25-35 age bracket. As the age of borrowers increase beyond 35 years the opt-in rates reduce significantly.

This correlation of opt-in with age, is surprising. Does a young borrower have a more negative outlook on the economy as compared to aged borrowers or is it due to lower incomes and saving that he would have got compelled to opt-in for moratorium? In which case, they would have required higher flexibility and therefore wanted to conserve cash. For middle aged borrowers and those over 50, who have a lower share in the moratorium opt-in pie, did not opt-in as much due to higher loan amortisation (higher equity built-up) or was it due to the visible retirement horizon. One can only guess.

Self-employed borrowers have opted-in more than the salaried borrowers but only marginally. This is true for prime as well affordable housing borrowers. 

This piece of data would surprise most of you.

The difference in opt-in rates is surprisingly very small between self-employed & salaried borrowers, both in prime as well as affordable housing segment. Does this mean that the business owners and employees, have a similar outlook on their near-term employment prospects and business viability or is it just a case of persons thinking alike in terms of conserving cash during bad times?

Higher the risk, higher the opt-in rates. Across major risk variables, such as LTV, FOIR, bureau score, new to bureau etc., the opt-in rate increases with increasing risk variable range. 

This outcome is without much ambiguity of interpretation and logically so, is also in line with the general expectation. Leveraged borrowers with low down-payment and previous history of impairment would take the opportunity to arrest their cash flow deterioration.          

In India, it was believed that customers have high emotional attachment to homes, therefore portfolios are agonistic to risk variables and delinquencies are purely out of circumstances of job loss, death, social obligations etc. While speaking to colleagues in various global markets, they would always mention that based on their experience in other global markets, correlation to risk variables get established when a market goes through a crisis. Looking at the early trends of the moratorium data, it does prove that India is not an exception to global markets.

This I think is the key take-away of this analysis. In riskier times the primary & secondary risk variables do speak a lot about the quality of credit. 

New to credit borrowers have opted-in lesser than credit tested 

*New to Credit/ NTC- Borrowers who have never availed any loan from any bank previously

The assumption of majority of the bankers has come untrue. On hindsight, this does not surprise me. NTC is also a proxy for first time home buyer as opposed to second- or third-time home buyers, who are often believed to be investor or speculator in real estate. This could be one of the possible explanations for NTC customers behaving better than credit tested customers.    

When a lender looks at these moratorium opt-in rates, he is probably not sure what is bothering him more, the aggregate opt-in rate itself or the fear as to how many of these opt-ins are going to turn into non- performing loans. The borrower also probably is not sure at this point of time if his opt-in was just a muscle memory action while he was sure that he would not be impacted by a job loss or business slowdown.

We will all have to wait till September of 2020 to understand the fate of borrowers and lenders alike, whether these opt-ins will translate into 10%, 20% or more turning delinquent. Well, if more than 50% of opt-in borrowers roll forward, no amount of reserves, provision and capital can take care of the lender’s woes. As for the fate of opt-in borrowers, I hope, none of them get impacted by Covid slow down and they are all able to save these 6 months EMI to prepay their loans immediately after the covid-19 storm has passed. In any case, the Indian consumer would have come of age by the end of this crisis, without any doubt.  

Disclaimer:

The author, Shrikant Shrivastava, is the Chief Risk Officer (CRO), of IMGC.

IMGC is India’s first credit default guarantee company. It is a JV of NHB, IFC, ADB & Genworth Inc. The views expressed in this article are personal and do not necessarily reflect the views of IMGC.