Académique Documents
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Mritunjay Kumar
Doctoral Student, XLRI, Jamshedpur, India, Resident: Nageshwar colony, Boring Road, Patna
Tel: +91-9431017287, 09234877342
E-mail: mritunjayk6@gmail.com
Abstract
Introduction
The Housing Finance is the major driver of Retail growth for Banks & Financial institutions in India.
The Housing Finance constitutes roughly 47% of total outstanding retail loans and 12 % of Total Loans
& advances for all scheduled commercial banks as on March 2007, as evident from Table 1.
The mortgage loan is the most commonly used terminology in USA and many of the developed
and developing countries. In India, the synonyms for Mortgage loan are Housing Loan.
The relative size of the domestic mortgage market in India is small as compared to USA &
some of the European & Asian countries in terms of the proportion of their respective GDP Size. The
Mortgage market size in India at Rs.2.25 trillion is still just 5% of the GDP size compared to 70% in
USA, 80% in UK, 94% in Denmark, 52% in Germany, 50% in Hong kong, 46% in Canada, 36% in
Singapore, 26% in Malaysia, 16% in Thailand, 14% in South Korea, 11% in China. While some of the
market is showing maturity in terms of growth, India has a different story. The CAGR (compounded
annual growth rate) in terms of Housing loan disbursement by the banks for the period 2000-01 to
2007-08 has been around 30 percent. Further, the growth in Housing loans by some of the leading
Mortgage lender & key player in the market has been targeted at 33%. According to Crisil Research, it
is estimated to grow at 12 percent over next five years. The present trend of growth combined with
existing house shortage of around 24.71 million as on 2007(11th Five year plan working group report
on urban housing) makes it an attractive potential market. As the number of players joins in to quickly
build the volume, there is somewhere concern that rapid expansion of credit will increase the
possibility of relaxation of income criteria for consideration of loan and financial institutions will dilute
the lending standards to accommodate those whose income stream is not guaranteed or secure.
This concern is based on the trend observed in USA and other developed market. 100 percent
lending became much common in USA. This easing of lending norms is one of the major driver of
observed increase in early payment defaults in the USA ( Kiff and Mills 2007: Gerardi, Lehnert,
Sherlund and Willen, 2008) has shown that lending standards declined more in areas that experienced
larger credit booms and house price increases.
There seems to be a great variation in lending standards (as data suggests) across major players
in India. The major player can be categorized into four types, namely SBI & Associate Banks,
Nationalized Banks, Foreign Banks and other scheduled commercial banks (OSCBs) which also
include Private Banks like HDFC, ICICI, Axis Bank etc. (Figures as on 31st March2007)
The average ticket size variation between SBI & Associates: Nationalized Banks: Foreign
Banks: OSCBs (Pvt Banks) in urban area are in the ratio of 1:1:4:2.
Variation in standards across the industry imposes systemic risk which can be a potential threat
to the sector.
While there is perceived opportunity by the financial Institutions (FIs) to profitably deploy its
fund into housing sector, which is likely to give an attractive returns for the medium term of 5 years to
long terms of 20 years, there is also enhanced risk of default, leading to substantial locking of funds.
The Bank has to choose the optimal tradeoff between profitability and risk.
Default risk is the uncertainty surrounding a borrower’s ability to service its debts and
obligation. The Bank, particularly the Public sector bank cannot discriminate between various
borrowers in lending money, as Housing sector upto Rs.30 lacs also comes under priority sector
lending. The bank at best can make probabilistic assessments of the likelihood of default. The bank at
any point of time holds millions of loan accounts under various categories. Like other rare events with
high costs, default risk can be effectively managed in a portfolio. (Source: Managing Bank risk – An
introduction to Broad base credit engineering by Morton Glantz, Academic press).
The portfolio approach requires to measure the default correlations. Correlations measure the
degree to which the default risk of the various borrowers and counterparties in the portfolio are related.
The probability that a borrower will default (Default probability) and the extent of the loss incurred in
the event that the borrower defaults (loss given default) together constitutes to arrive at the total likely
default to help bank make provision against Bad Debts.
The Banks frequently use broad indicator approach that makes use of a number of variables to
help build a credit scoring Model. The variables used in the model are sound in estimating the
probability of default of an applicant and secondly their explanatory power is used in analyzing the
loan application. The variables are broadly divided into four main categories, namely: Demographic
Indicators, Financial Indicators, Employment Indicators and Behavioral Indicators.
The demographic variables establish the identity of the borrower for the purpose of the loan and
looks at legal aspects. These variables do not have the highest importance but they capture various
regional, gender and other relevant differences. For example, it is often found that old man is less risky
than young men. In general, the risk of default decreases with age. Home owners also represent a less
risky category due to a house as collateral.
The Financial indicators are used to determine the quantum of loan. The bank considers 40 to
60 times of the Net monthly Income (NMI) or 75% to 85% of the value of the property, whichever is
lower.
The employment indicator is used for fixing repayment period and for the purpose of
documentations.
While financial indicators initially sets the limit of advance for each borrower, at later stage,
more than financial, it is non -financial parameters that affects financial aspect and matters in the
default risk. For example, credit scoring model do not consider education as a variable. Empirical
evidence suggests that a factor such as age, education, income and marital status affects an individual’s
risk tolerance. The risk loving nature of some of the individuals may jeopardize the repayment
schedule towards housing loan instilments.
International Research Journal of Finance and Economics - Issue 58 (2010) 153
One of the major objectives of this paper is to identify the demographic determinants of the
Housing loan Default risk in the Indian condition (with a case study of one of the urban centre, city like
Patna), since the demographic profile of the country is different in many ways with rest of the
developed mortgage market, where some of the hypothesis has been tested. ii) The other objective is to
identify the type of households in the population more prone to default on payments. iii) How
demographic and situational factors (such as employment status, family type, income level, locations)
coupled with behavioral aspect affect default risk. The essence of the study is that none of the broad
indicators categorized into four category work in silos, rather they interact in a dynamic way and the
relative importance increases or decreases over the life time of the mortgage loan.
The rest of the paper is divided into Literature review. The third section will focus on Housing
market condition and the demographic profile of the borrower. The fourth section is concerned with
Research questions and Research design which deals with data, construction of variables and
descriptive statistics. The fifth section will present the empirical findings, and result of hypothesis
testing, followed by conclusion in sixth section.
Literature Review
The most commonly mentioned causes of default in the literature are: Easing of lending norms, lending
standards, negative equity, borrowers personal characteristics, Loan to value ratio (LTV), Purpose of
purchase, income of the borrower, credit score, contemporary economic condition, payment to income
ratio, loan tenure, location, unemployment, marital status, credit history, age, trigger events (like
divorce, loss of a job, accident or sudden death), default cost, default as a rational decision, decision to
relocate, wealth maximization etc.
There are two competing theories on default of Mortgage loans: Equity maximization model
and Ability-to-pay model. The “equity theory of default” suggest that borrower base their default
decisions on a rational comparison of the financial costs and benefits in continuing (or discontinuing)
the periodic payments on the mortgage loans. The borrower will choose to default if the financial
benefits are less than financial cost. The borrower thus engages in optimizing behavior. The model
however does not include other cost like Psychic costs involved like argument with the financial
institutions on a regular basis, etc. The ability to pay theory suggests that the borrower will not like to
default as long as their income flow is sufficient to meet the periodic payment without placing any
undue burden on the household. The term household is used as because the house property is one of the
major assets of the household and even if the mortgage property is in name of the borrower, it involves
many times collective decision of the family members, though the degree of the decision making vary
among family members. The equity theory implies that probability of default is positively related to
three things: the market value of the mortgage property, the outstanding loan and Loan to value (LTV)
ratio. Jerry and David (1980) while testing the two hypotheses finds that the equity theory of defaults
dominates the ability-to-pay hypothesis.
The Disaggregate data allows us to study the determinants of mortgage arrears at the household
level, allowing us to capture the idiosyncratic factors like income shocks, relationship breakdown.
Coles (1992) found that unemployment and relationship breakdowns could each explain around 25%
of arrears, and those in arrears were typically self-employed, mostly working in an industry with
exposure to the construction industry, or working in sales-oriented businesses.
Burrows(1997) used a logistic regression to model the likelihood of households being in arrears
of three months or more. The results suggested that households were more likely to be in arrears if they
had a 100% mortgage, were employed part-time or unemployed or unable to work, worked in the
private sector (relative to the public sector). Böheim and Taylor found that age was important: old
heads were less likely to experience housing finance problems. Households with higher income and at
least two members earning in a households were also less likely to face housing finance problems. In
some findings it is found that the proportion of households reporting repayment problems is higher if
154 International Research Journal of Finance and Economics - Issue 58 (2010)
the head of the household is female. The house has problem if the head of the household is currently
unemployed, the household faces problem if the partner is disabled or unemployed.
Orla and Tudela(2005) found that persistence in mortgage payment problems was greater
among households in which the head was 35 years old or over than it was among households headed
by younger individuals. That is, younger households are more capable of getting out of problems than
those aged 35 or over.
Lending standards declined more in areas that experienced large credit booms and house price
increases,(Ellis, 2008). Loans within the same geographical area and property type tend to exhibit
correlation in default incidence (Yildiary Yildirium, May2007). Lawrence and Arshadi(1995) used the
logit model using a series of borrower and bank variable to analyze the management of problem loans
and to determine the resolution choice.
Logit model was also used by Campbell and Dietrich (1983) to show that the age of the
mortgage, the LTV ratio, interest rates and unemployment rates significantly explain mortgage
prepayment, delinquencies and defaults.
Logit, probit and Discriminant analysis are the most commonly used research methodology to
examine factors for different level of default risk. Jackson and kaserman (1980) used multivariate
regression and probit analysis to measure default risk. Charitou, Neophytou and Charalanbous (2004)
found that the logit method is superior to other methods in predicting defaults. The various methods are
often comparable in results due to the fact that there exist some mathematical relationship between
various models being used. However, the popularity of logit method is mainly due to the fact that no
assumptions are imposed on variables, with the exception of missing values and multi collinearity
among variables. Contrary to this, non-parametric methods can deal with missing values and
multicollinearity (or correlations) among variables, but often are computationally demanding.
The housing loan borrower exhibit four types of payment behavior: become delinquent (delay
payment), default thereby inviting foreclosure, prepay through refinance or resale, pay the regular
installments. The delinquency or the default are somewhat related and varies in degree, it points to
problem in borrower and lender relationship. Gardner and Mills (1989), recognize that delinquent
borrowers do not necessarily end up in default, employ a logit regression model to estimate the
probability of default for currently delinquent loans. They recognize that the Bankers use this method
to identify the severity of the problem loan to enable them to formulate an appropriate strategy to deal
with such delinquencies. The Indian banks identify the delinquencies which are in the early stage as
“soft NPAs”. NPA are the abbreviation for non performing assets.
Kau and keenan(1998) treats default as a rational decision and in his research paper provides
the entire distribution of defaults’ severity. The distributions of severity are both disperse and skewed.
The severity distribution shifts more than in proportion to the rise in the loan to value (LTV) ratio.
Further, he has demonstrated that severity of default rise as we increase the LTV ratio.
According to empirical model, negative mortgage value motivates financial defaults. The
mortgage value is equity (the amount paid by the borrower from his savings to the developer apart
from Bank loan and some more investment in the house for furniture & fittings, registration cost etc.),
house value less mortgage balance, and the value of prepayment and default options imbedded in
mortgage contract.
The default imposes personal costs on borrowers that include limits on occupational and credit
opportunities, social stigma and damage to reputation (Kau, keenan and Kim, 1993; and Vandell and
Thibodeau,1985). If these costs exceed the absolute value of negative equity, the borrower will not
default.
Dennis and Cross (The delinquency of subprime mortgage) using nested and multinomial logit,
finds that credit scores and loan characteristic play an important role in loan defaults and that
delinquency and defaults are sensitive to current economic conditions and housing markets. In many a
cases, the trigger events are potential cause of loan defaults and payments. Typical trigger events
include losing a job, a severe illness, or the breakup of the household.
International Research Journal of Finance and Economics - Issue 58 (2010) 155
The locations matter in many a case like frequent cyclone devastations in some places,
proximity to seismic zone, where earthquakes are severe, etc. Brent Ambrose and Sanders (2001) finds
that the properties located in the west (USA) are more likely to prepay relative to other regions.
Further, the mortgage on southern are less likely to go to full term relative to those in the west. They do
not find any statistical relationship between LTV and prepayment or default. He finds that mortgage
with higher LTV at origination are more likely to go to the full term. Von Furstenberg has documented
a consistent nonlinear relationship between default incidence and the age of the mortgage.
Some studies suggest that income reductions or interest rate increase should be more important
than equity levels in influencing the decision to delay payments.
The loan-to-value (LTV) ratio has been found as a key variable in explaining the probability of
Mortgage loan default in several studies by Vandell(1978), Ingram and Frazier (1982), Campbell and
Dietrich(1983), Vandell and Thibodeau(1985), Mills and Lubuele(1994), Deng et al. (1995).
Another important variable in explaining the probability of default is debt-to-equity ratio (page,
1964). Stansell and Millar (1976), Vandell (1978), Ingram and Frazier (1982), have found that
payment-to-income ratio is positively correlated with the probability of default (i.e, higher the payment
to income ratio, greater is the default risk). Some Banks consider repayment (equated monthly
installments to Net Monthly income as 40 % to 55%). Banks also permitting higher LTV ask for
additional collaterals or guarantee. William, Baranek and Kenkel (1974) have found that borrowers
having initial payment to income ratio exceeding 30% have higher default rate.
Simulation analysis has been used by Vandell and Thibodeau (1985) to demonstrate several
non-equity factors overshadowing the equity effect on default which helps to explain why some
households with zero or negative equity may not default, while others with positive equity may.
Clauretie ( 1987) has also argued that other non-equity factors like sources of income, property value
and borrower characteristics clearly play a larger role in affecting default levels.
Lee (2002) has identified the ‘ purpose of purchasing real estate property ‘ is one of the key
determinants of default risk. Therefore, when the market price of collateral falls sharply or economic
performance becomes much worse, the property frequently will be abandoned by the owners thereby
limiting their loss.
Follian, Huang, and Ondrich (1999) include in their model tenure, location, demographic and
economic variables as covariates to explain default.
Studies of von Furstenberg and Green (1974), Avery et al (2004) have assessed local situational
factors as factors of default risk. They find that inclusion of situational factors (like unemployment
status, marital status, credit history etc.) and other borrower specific characterrs (joint account or single
account, age, location of the borrower etc.) improves the performance of the scoring models.
Riddiough (1991) has found various trigger events, such as divorce, loss of a job, and accidents or
sudden death has influence on default behavior. Eichholtz ( 1995)has observed the relationship
between regional economic stability and mortgage default risk in Netherlands.
house is the only solution. This would also ensure that the financial institutions, even if they are asked
to lend to people under financial inclusion, will able to contain their loss given default (LGD). For
PSBs, lending to housing sector is not only mere a commercial decision, but also carries obligation to
fulfill social commitment. The Banks has to necessarily lend 40% of their total advances towards
priority sector. The lending to housing sector up to Rs.30 lakhs comes under priority sector.
The Bank raises deposits for short term which range from 91 days to maximum period of 10
years. The Housing loans are generally long term. It ranges from 5 years (Minimum) to 52 years
(Difference of maximum permissible 70 years – eligibility age 18 years). This requires matching of
asset and liabilities, maturity wise and Interest rate wise, on ongoing basis and constant tracking of
loan account. According to Basel Norms and Income recognition norms, the Bank has to classify its
loan account into standard, sub-standard, Doubtful and Loss Assets. The bank has to keep provisions
for all its assets depending on type of classification, varying between 0.40% on Standard assets to
100% on loss assets.
In case of residential mortgage loans, when such loans are past due for more than 90 days they
will be risk weighted at 100%, net of specific provisions. Thus the moment such loans become
delinquent for more than 90 days, the bank has to carry higher risk weight from 20% in case of
standard account to 100% in case on NPA. This seriously limits the lending ability of the banks.
There are three kinds of players in the Housing Finance: Financial institutions, Scheduled
commercial banks, and other Institutions. Presently there are 88 SCBs including 28 PSBs & 18 Pvt
Banks; and 29 HFCs. Towards the end of the 1990S, against backdrop of lower interest rates, industrial
slowdown and financial deregulation, commercial Banks shifted their focus from the wholesale
segment to retail portfolios. Housing Finance traditionally has been characterized by low
nonperforming assets (NPAs). However, the asset prices over the last few years rise has been
disproportionate to the income level of a first time house loan Borrower. Past trend has shown House
loan disbursement of CAGR OF 31 percent during 2000-01 to 2007-08. The disbursement made in last
3 years constitutes 68 percent of the outstanding portfolio. Presently the SCBs among themselves
constitute roughly two-third of the total outstanding Housing loans.
Table 2: Regional and bank-group wise classification of outstanding housing loans of scheduled commercial
banks as on March 31
The SBI& Associates account for 1.57 mn number of loan accounts, almost 31.44% of total
number of loan accounts. However, in value terms, it accounts for only 22.35% of the market share.
There seems to be disproportionate holdings of loan portfolio among different banks. The Foreign
banks and other scheduled commercial Banks (other SCB) holding high value advance. It could be due
to liberal finance or excessive funding approach.
The Foreign Banks has larger presence in Metropolitan cities. Other SCB dominates in the
Metropolitan centre where they have large exposure compared to Nationalized Banks or SBI &
Associates. It seems the Private Banks have followed aggressive lending policy in Metropolitan center,
where they clearly left behind the Nationalized Banks in terms of value of loan disbursement, despite
the fact that Nationalized Banks hold much larger number of loan accounts vis a vis Private Banks /
other SCB. The SBI & Associates hold only 12.86% market share in Metropolitan centers. The
Nationalized banks are leader in Rural Market, followed by SBI & Associates. The SBI & Associates
are leader in Semi urban centre, followed by Nationalized Banks. There seems to be greater
competition among all Banks in urban centre.
98.25% of loan size is covered under range of Rs.25, 000/- to Rs.10 million, that is $ 560 to $ 2,
22,220. There seems to be a great variation in asset price from Rural to urban. Within each centre,
Rural, Semi urban, Urban, and Metro there seems to a wide variation in type & quality of the House.
The Wide variation in asset price could be explained in terms of location, type of House, Size of the
House, Purpose, Income level etc.
Table 5: Size of credit limit-wise classification of outstanding credit of scheduled commercial banks
according to occupation March 2007
The loan ticket size (Rs.25, 000/- to Rs.2, 00,000/-) constitute the greatest number, 50.49% of
the total number of housing loan accounts in 2004. Within three years, from 2004 to 2007, there has
been gradual shift, as percentage has fallen from 50.49% to 37.12% in this category, and shift is
towards Rs.2, 00,000 to Rs.5, 00,000. The median value in value terms in 2004 has been Rs.5, 00,000
to Rs.10, 00,000 (Rs.0.5 million to Rs.1 million). The shift in 2007 is clearly towards Rs. 1 million to
Rs. 2.5 million, which points towards rapid rising asset price and emergence of the new income class,
liberal finance available from the lending institutions.
Clearly, one fifth of the total outstanding loans are catered to the rich class, where House price
becomes affordable in the range of Rs. 5 million to Rs.10 million. Such numbers are in the range of
70,000 people and probably distributed in Metropolitan centers. This is to be examined in case of
Patna, one of the urban centers.
Disbursements in the housing finance industry are affected by factors such as the Average
ticket size (ATS) value and the number of housing loans disbursed. Average ticket size (ATS) is in turn
affected by factors like average area of the house, average loan-to-value (LTV) ratio and the price per
square feet of the house.
There are 484 million workforces in the country. Out of which 273 millions are engaged in
Agriculture, 61million are in Manufacturing sector and 150 million in Service sector. The education
level among the workforce is that 400 millions are under matriculate, 48 millions are intermediate, and
another 48 million are diploma holders or graduate.
The 784 million population lives in Rural area, 224 millions in 2nd Tier Cities and 112 millions
in top 20 cities. The household is divided into three categories: Lower Income household with income
less than Rs.71000/- per annum, Middle Income household with income range of Rs. 71000 to Rs.
2,85,000/- per annum, and upper income household with income more than Rs. 2,85,000/- per annum.
There are 46 million lower income household, 136 million middle income household and 37
million upper income household.
There urban population in India is 336 million (30%). There are 607 cities with a population
size of more than 50,000. Out of 607 cities, 35 cities are with a million plus population. The NHB has
created a housing index of 15 cities that keeps track of Housing prices. These cities are : Delhi,
Bangalore, Mumbai, Kolkatta, Bhopal, Hyderabad, Faridabad, Patna, Ahmedabad, Chennai, Jaipur,
Lucknow, Pune, Surat and Kochi.
Presently the Rural & semi urban centre commands 21% of the outstanding housing loans
where as Urban and Metro centre commands 79% of the outstanding loans in terms of value. The seven
Metros alone command around 55% of the Housing market. The urban centre among themselves
command 24% of the housing market. The southern States clearly dominates in Housing construction
and Housing Loans. The 4 southern state corner roughly 1.9 million housing loans out of country total
of 5 million, which constitutes 38% of the total housing loans. This may be attributed to 3 Metropolitan
centres in the southern region, namely, Hyderabad, Chennai, and Banglore. Each of the 4 Southern
state covers nearly 0.5 million housing loan.
Table 3: State and population group-wise classification of outstanding credit of scheduled commercial banks
according to occupation
Again similar pattern is evident In western state like Gujrat and Maharashtra which has two
Metropolitan centre like Mumbai and Ahmedabad. Together the two state covers 1 million housing
loans, which is 20% in percentage term, and 25% in value terms. The Housing loan in Bihar is 19% of
the total number of Housing Loan in Eastern region. It comprises 2.4% of the All India total number of
housing loans.
No. of No. of
Limit C.F Limit C.F
accounts accounts
>100 Lacs 4 4 20 lacs-25 lacs 68 136
75 lacs – 100 lacs 2 6 15 lacs- 20 lacs 198 334
50lacs-75 lacs 7 13 12 lacs- 15 lacs 226 560
45-50 lacs 2 15 9 lacs-12 lacs 484 1044
40-45 lacs 4 19 6 lacs- 9 lacs 1273 2317
35-40 lacs 7 26 5 lacs- 6 lacs 690 3007
30-35 lacs 17 43 3 lacs- 5 lacs 1928 4935
25 lacs- 30 lacs 25 68 Below 3 lacs 2418 7353
Within Patna, the Housing loan disbursed by particular leading bank is 7353 A/cs. Out of these,
only 1044 loan accounts have limit of Rs. 9 lacs & above or 3000 accounts with loan above Rs. 5 lacs.
That means, there are roughly 30,000 housing loan accounts in Patna with around 4000 loan accounts
with limit above Rs.9 lacs and roughly 12000 loan accounts with limit above Rs. 5 lacs.
The housing prices in Patna have gone high in past 9 to 10 years. For example, house costing
Rs. 7 lacs in 2000 costs Rs. 40- Rs. 45 lacs in 2010. The prices have gone high by 5 to 6 times in past
9-10 years. The prices nearly going high by more than 50% every year. So, a loan of Rs. 7 lacs in year
2000 may correspond to a loan of Rs. 30 lacs in year 2009-10. The year wise loan disbursement is as
under:
Year No. of Avg. Ticket Year No. of Avg. Ticket Year No. of Avg. Ticket
A/cs Size A/cs Size A/cs Size
(Rs.lakhs) (Rs.lakhs) (Rs.lakhs)
1981 1 0.60 1991 46 2.50 2001 330 4.10
1982 2 1.60 1992 45 2.25 2002 364 4.10
1983 5 2.05 1993 71 2.10 2003 382 4.55
1984 4 1.80 1994 55 2.15 2004 671 5.50
1985 16 2.50 1995 50 2.25 2005 728 5.35
1986 19 1.90 1996 118 2.95 2006 424 5.65
1987 24 2.90 1997 233 3.30 2007 625 5.50
1988 33 2.30 1998 149 3.80 2008 1052 6.60
1989 12 2.10 1999 195 3.50 2009 1482 7.15
1990 16 2.10 2000 213 4.25
International Research Journal of Finance and Economics - Issue 58 (2010) 161
The National Housing Bank for the purpose of Housing Index called “ NHB residex” has
divided Patna among 5 zone.
Zone 2 Nehru Nagar (Punaichak), Shiv puri, Jagnarayan path, Patel Nagar, Anandpuri, Indra Nagar, Dujra,
Chakaram, Uttari Mandir, Baldev Bhawan Road
Zone 3 R-Block, Mountasari Lane, Gandhi Nagar, Basant Vihar colony, Patliputra Colony, Rajapur, Kidwaipuri, Sri
Krishna Nagar, Buddha Colony, Sri Krishna Nagar Park, Mandiri Kathpul, Shanti vihar
Zone 4 Akashwadi
Zone 5 Paschim Boring Road, Purvi Boring Canal Road, R K Bhattacharya Road
Other Zone Kankarbagh, Phoolwari, Bailey Road (New), Gola Road
The current market prices for residential purpose in Patna outskirts & within the heart of the
city range from Rs.2500/- sq.feet to Rs.4500/- sq.feet. In 2000, the price for the same was in the range
of Rs.350/- to Rs.700/- per sq. feet. The rise in prices has made the existing house of the borrowers
more valuable to them and would thus prevent them from default in the Housing loans. Further, there
has been rise in income of the salaried employees, as well as business man. The average rises in
income level of the employees as a case shows increase in gross income of 29 times over a period of 23
years. This is more likely to make it easier for the borrower to repay debts if he has been meeting the
interest payment on regular basis. For Example, a loan of Rs. 1 lac availed in 1984 would seem smaller
amount by the year 1994.
The default in the loan amount occurs generally in the first 5 to 6 years of the disbursement of
the loan, given the fact that there is generally the moratorium period of 12 to 18 months in the case of
the housing loans, after which the repayment starts. The rising price of the real estate on one hand
makes the value of the House valuable for the borrower, on the other hand, the rise in income level and
thus rise in disposable income & decreased value of the outstanding loan amounts makes it much more
attractive for the borrower to repay the loan and free the property from all encumbrance, that is to free
the house property from the equitable charge of the banks. The rate of default decreases with later half
of the loan tenure is evidenced from the data of the delinquent loans as under:
Variable Definition
Age 1:Below 30, 2: 30-35, 3: 35-40, 4:40-45, 5: 45-50, 6:50-55, 7:55-60, 8: Above 60
Sex 0: female, 1:Male, 2: Male & Female Joint Borrower
No of Income earner in the Household 0: one income, 1: double income, 2: three earner, 3:four earner, 4: more than 4 earner
Marital status 0: single, 1: Married
Profession 0: salaried, 1: self-employed professionals, 2: Traders, 3: Agriculturist, 4: Contractual,
5:Unemployed
Education level 0: under matriculate, 1: Intermediate, 2: Bachelor degree / Diploma Holder, 3: Postgraduate,
4: Doctoral
Net income of the Borrowers at time of Gross income minus expenses
loan
Total gross income of the borrowers at Total gross income
time of loan
Present Net monthly income
Present Gross income
Amount of loan availed
Amount of loan Outstanding
Number of co-borrowers present
Co-borrowers monthly income
Original tenure of the loan 0: 5 year, 1: 5 to 10 years, 2: 11 years to 15 years, 3: 16 years to 20 years, 4: over 20 years
Number of members joined in job market 0: 0, 1: 1, 2:2, 3:3, 4:4 and over
after loan
Property located in top 20 ciities
Property located in other cities
Property located in Rural areas
Remaining period of the loan
Loan to value Ratio
Market value of Collateral
Current location of the profession
Income category of the Household
No of Installment fixed
No of installment paid before default
International Research Journal of Finance and Economics - Issue 58 (2010) 163
Research Design
Choice of Respondents
The Housing loan delinquents.
Sampling Method
The sample selected from the banks & FIs will be random sample. The sample will be classified into
delinquent and default groups, and analyzed by factors.
The research methodology used will be logit, probit and discriminant analysis.
The Population mean would be All India Figure and Bihar State Figure. The Sample mean
would be Figure for Patna. The number of defaulter would be arrived to project a default risk at the
national level.
The analysis of data will be carried out using Statistical package for the Social Sciences
(SPSS). The Statistics tests will be t-test, chi-square test and ANOVA.
Questionnaire Description
The Questionnaire will comprise of 25-30 questions based on Age profile, Initial Mortgage loan,
Occupation, Income level, co borrower, family size, tenure of the loan, the period when first default
took place, education level, asset price, nature of profession, etc. would be administered to the
respondents to incorporate the dynamic changes within the variables.
Product Selected
The housing loan availed across Banks in Patna and currently in delinquent stage would be gathered.
Analytical Techniques
To predict the probability of housing loan default, based on financial, non financial, situational factor,
we need to use logistic regression exercise. A logistic regression has the flexibility of incorporating
both the qualitative and quantitative factors and is more efficient than the linear regression probability
model.
Here we choose the outcome variable, repayment habit, as the Dependent variable and the
predictor variable such as Age of the borrower, household income, gender of the borrower, profession,
place of construction and place of residence as independent variable.
Anticipated Findings
Out of total number of 7353 housing loan accounts, there are 6511 male accounts holders and 825
female accounts holders and remaining 17 are joint account holders. Further there are 3751 staff loan
accounts and 3602 public housing accounts. There are 6309 low value loan accounts (low value loan
164 International Research Journal of Finance and Economics - Issue 58 (2010)
accounts are referred to as the outstanding loan amount is below 30 % of the property value) of amount
of loan limit below Rs.9 lacs and only 1044 loan accounts have loan exposure limit above Rs.9 lacs.
The female borrower has higher percentage of default rate @ 6.65% compared to 3.83% default
rate of the male borrower. The Asset code of Non Performing Assets(NPA) and the gender are
summarized in the table as under:
The loan concentration is more in some areas compared to the other parts of the city. It could be
summarized in tabular form as under:
The Ashiananagar, Saguna More, Digha bye pass, Khagaul are rapidly getting concentrated
with new settlements in these areas.
Out of total number of loan outstandings, around 1014 loan accounts comprising, 13.79 % of
the total loan accounts have borrower working outside Patna. The Bank official have to make at least
an annual inspection of the house in case of the regular loan accounts and more frequent visit in case of
delinquent accounts. In such cases, where the borrowers are working outside the city where loan has
been granted and equitable charge has been created, the bank has to devise a method other than
inspection part to recover regular installments from these borrowers and also arrange for Inspection
and compilation of the opinion reports on these borrowers.
The Study of the delinquent accounts (NPA accounts) reveal that borrowers locally employed
default more than the outside borrower as banks are very selective in granting loans to borrowers
employed outside the city and have better check on the credential of the borrower. The locally
employed borrowers have defaulted @ 4.40% whereas outside employed borrower have defaulted @
2.56%. It could be placed in tabular form as under:
Further it is observed that the percentage default is more among the educated & professional
class and the borrowers defaulting are employees of Labour commissioner, police, Advocate, Defence
personnel, Businessman, Small business & retail traders, Executive engg, Judicial officers, Telecom
employees, Doctors & veterinary Doctors, Power sector employees like Electricity supply division,
International Research Journal of Finance and Economics - Issue 58 (2010) 165
Magistrate, Minor irrigation deptt, government employees, Beautician, hotel industry, Book vendor
etc.
However, the income is linked to the borrower education level and borrower skill, that is the
borrower with higher education level and higher skills have generally better income than the borrower
with lower education level and thus with lower skills. Thus it is observed that a post graduate & a PhD
start with starting salary of Rs. 3 lakhs & above, we see that the percentage default for loan limits of
Rs. 3 lacs & below is 6.07% compared to borrower with loan limits of Rs. 3 lacs & above with default
percentage of 3.20%. The Loan category in the bracket of Rs.6 lacs to Rs. 15 lacs has lower percentage
of default @ 2.25%. Thus borrowers with better higher education level are less likely to default than
borrowers with lesser education level.
Limit in Rs. lacs No.of Default loan Total number of loan % of loan default
accounts accounts
20 lakhs & above 1 136 0.73 %
15 lakhs - 20 lakhs 9 198 4.54%
12 lacs - 15 lacs 6 226 2.65%
9 lacs – 12 lacs 10 484 2.06%
6 lacs – 9 lacs 29 1273 2.27%
3 lacs – 6 lacs 103 2618 3.93%
Below 3 lacs 147 2418 6.07%
Average ticket (loan) size is more in branch located in professional areas like in case of P.B.B
Doctors colony with ticket size of Rs.10.03 lacs is ahead of Personal Banking Br.
Branch No. of No.of loans Avg. Branch No. of No.of loans Avg.
Loan in last 5 Ticket Loan in last 5 Ticket
accounts years Size accounts years Size
Patna Sectt. 654 406 4.16 Patliputra 172 77 5.36
PBB Patna 572 383 9.47 Maurya Lok Complex 168 99 6.14
J.C.Road 286 191 4.34 Fraser Road 151 72 4.21
AshianaNagar 272 97 4.87 Bailey Road 146 88 4.52
Boring Road 272 125 6.32 P.B.B Doctors Colony 132 132 10.03
The anticipated findings are like there is likelihood of significant difference in repayment
across age, gender, income, and education level. Also, place plays an important role, the geographical
distribution.
Regression
Variables Entered/Removed
Model Summary
ANOVAb
Coefficientsa
Model Standardized
Unstandardized Coefficients Coefficients
B Std. Error Beta t Sig.
1 (Constant) 1.969 .378 5.214 .000
Age at the time of Sanction -.035 .010 -.367 -3.346 .001
a. Dependent Variable: Whether regular repayment or Default occurs
The value of R2 is. 135, which tells us that age of the borrower at the time of sanction of the
loans, can account for only 13.5% of the variation in repayment habits. That means that 86.5% of the
variation in repayment habits and therefore chances of default cannot be explained by the age of the
borrower. Therefore, there must be other variables that have an influence also.
The F- ratio is 11.193. The result tells us that there is less than 0.1% chance than an F-ratio this
large would happen by chance alone.
As the probability of F is greater than the significance level α, H0 is not rejected. That is, there
is no significant difference in repayment habits across age groups.
Logistic Regression
Case Processing Summary
Parameter
coding
Frequency (1)
Present Occupation of the 1 1.000
self NOT KNOW 2 .000
Parameter coding
Frequency (1) (2)
Household Monthly 2520.00 1 1.000 .000
Income(Total Income of 3736.00 1 .000 1.000
all the Family Members) 8325.00 1 .000 .000
Present Occupation of the 1 1.000
self NOT KNOW 2 .000
Classification Tablea,b
Observed Predicted
Whether regular repayment or
Default occurs
No Default Percentage
Occurs Default Occurs Correct
Step 0 Whether regular repayment No Default Occurs 0 1 .0
or Default occurs Default Occurs 0 2 100.0
Overall Percentage 66.7
a. Constant is included in the model.
b. The cut value is .500
168 International Research Journal of Finance and Economics - Issue 58 (2010)
Score df Sig.
Step 0 Variables AGE_AT_SANCTION 3.000 1 .083
EDUCATIONAL_QUALIFICATION by 2.962 1 .085
HOUSEHOLD_MONTHLY_INCOME
EDUCATIONAL_QUALIFICATION by 3.000 1 .083
PRESENT_OCCUPATION(1)
EDUCATIONAL_QUALIFICATION 3.000 1 .083
INSTALMENT_PAID 3.000 1 .083
HOUSEHOLD_MONTHLY_INCOME 2.882 1 .090
PRESENT_OCCUPATION(1) 3.000 1 .083
a. Residual Chi-Squares are not computed because of redundancies.
Interpretation of Results
In this example, there are 2 cases where default occurs and 1 case where default does not occur.
Therefore, if SPSS predicts that every times Default occurs, 2 times out of 3, it will be correct
prediction. That is, 66.7% chance of true prediction is there that default will occur for housing loan
borrower over the life time of his loan period. However, if SPSS predicts that No default will occur, it
will be correct only 33.3% of the time. As such, of the two available options it is better to predict that
Default will occur because this results in a greater number of correct predictions.
The next part of the output summarizes the model, and at this stage this entails quoting the
value of the constant (b0), which is equal to 0.693.
The residual chi-square statistic was not computed because of redundancies.
In this example, all excluded variables have significant score statistic at p< .083 and so all these
variables could potentially make a contribution to the model.
Implications
The findings suggest that banks can incorporate weightage to these variables in calculating the
probability of default occurring and accordingly charging risk premium.
Limitations
1. There are various methods available for testing. All methods cannot be tested for the best result
because of time constrain.
2. The findings may be important & help in understanding but to what extent the results will be
factored by the banks, simply because of the operational convenience for the Banks. They are
happy dealing with at most with two to three variables, that is easy to understand and operate.
3. Many a time’s the borrower and the household in some context have been used interchangeably
depending on the contextual aspect on basis of a strong correlation which is very often
observed in day to day life.
International Research Journal of Finance and Economics - Issue 58 (2010) 169
References
[1] Bandyopadhyay, Arindam & Saha, Asish.(2009). Factors driving Demand and default risk in
residential Housing Loans: Indian Evidence. Online at http://mpra.ub.uni-muenchen.de/14352/
MPRA Paper No. 14352, posted 30.March 2009.
[2] Burrows, R (1997), ‘ Who needs a safety-net? The social distribution of mortgage arrears in
England’, Housing Finance, Vol.34,pages 17-24.
[3] Clauretie, T.M.(1987). “ The impact of interstate foreclosure cost differences and the value of
mortgages on default rate”, AREUEA Journal, Vol. 15 No.3, pp. 152-67.
[4] Coles, A (1992), ‘ Causes and characteristics of arrears and possessions’, Housing Finance,
Vol.13, pages 10-12.
[5] Dietrich, C. a. (1983). The determinants of default on insured conventional residential mortgage
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of FHA-insured mortgage terminations, Draft paper, Freddie Mac and University of Syracuse.
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portfolios. AREUEA Journal 2, 5-19.
[9] Gerardi, K; Lehnert, A; Sherlund, S; & Willen, P. (2008). Making sense of the subprime crisis.
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of competing Hypothesis.
[13] Kau, James B; Donald C. Keenan, & Taewon Kim. “Transaction costs, suboptimal
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mortgage loans. Journal of property Finance, Vol 8 No 3, 1997. PP 207-225
[19] May, Orla; & Tudela, Merxe.(2005). When is mortgage indebtness a financial burden to British
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1368-5562
[20] Riddiough, T.J. (1991). Equilibrium Mortgage default pricing with Non-Optimal Borrower
Behavior, University of Wisconsin Ph.D. diss.
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Questionnaire
1. Loan availed during the year:
4. Quantum (Amount) of the Loan:
5. Projected cost of the Building at the time of the purchase / construction:
6. Present loan outstanding:
7. Gross monthly income at the time of the Loan:
8. Gross monthly income of the partner / co-borrower at the time of the loan: Rs.
9. Gross monthly income during the (0-4 years) first 4 years of the loan: Rs.
10. Gross monthly income during the 5th to 8th year of the loan: Rs.
11. Gross monthly income during the 9th to 12th year of the loan: Rs.
12. Gross monthly income during the 13th to 16th year of the loan: Rs.
13. Gross monthly income during the 17th to 20th year of the loan: Rs.
14. Repayment period: ……………… installment / ……………… year.
15. Gross monthly income of the partner during the first 4 years of the loan: Rs.
16. Gross monthly income of the partner during the 5th to 8th year of the loan: Rs.
17. Gross monthly income of the partner during the 9th to 12th year of the loan: Rs.
18. Gross monthly income of the partner during the 13th to 16th year of the loan: Rs.
19. Gross monthly income of the partner during the 17th to 20th year of the loan: Rs.
20. Present Market value of the property:
21. The place of residence at time of sanction :
22. Place of purchase / construction:
23. The present location where you reside:
24. Age at the time of Sanction ………..
25. Occupational status at the time of sanction, whether employed / unemployed:
26. The type of occupation at the time of sanction:
27. Occupational status of the partner at the time of the sanction, whether employed / unemployed:
28. Occupational type of the partner:
29. Present occupation of the self:
30. Present occupation of the partner:
31. Educational qualification at the time of loan ……………
c) Non Matriculate
d) Matriculate
e) Diploma
f) Intermediate
g) Graduate
h) Post Graduate
32. Household Monthly income (Total income of all the family members): Rs.
33. If the Housing Loan is in default, year of Default:
34. The total period during which the loan is in default:
35. Interest Rate charged by the Bank:
36. Numbers of member in the family:
37. The Financing Institution…
International Research Journal of Finance and Economics - Issue 58 (2010) 171
a) SBI
b) HDFC
c) ICICI
d) Axis Bank
e) Standard Chartered Bank
f) PNB
38. Loan other than Housing and amount outstanding:
39. Gender of the self (Male / Female):
40. Gender of the Partner :
41. Reasons for Default of the loan:
42. Number of installment already paid:
43. Number of dependent member joining the job market after the loan:
44. Number of dependent family members:
45. Health of the borrower:
46. Equated Monthly Income / Net Monthly income at the time of the Loan:
47. Present Net monthly Income (after all deductions, excluding loan installment): Rs.
48. Tenure of the loan:
49. Head of the family:
Name
Address
Contact Number