Monday, January 5, 2009

Banks begin to revalue properties as prices fall

The revaluation exercise can help banks to invoke a clause in the loan documents that states that if the property value falls below the loan disbursed, banks can ask borrowers to pay the difference upfront. A borrower who is unable to do so can be classified as a defaulter. Banks have, however, not invoked the clause so far.

With a sharp dip in property prices, leading banks, including State Bank of India, are reassessing the value of properties against which loans have been granted.

Sources familiar with the developments said that banks are worried that the recent fall could impact their risk valuation, if asset prices continue to fall.

For home loans, banks offer up to 70 to 80 per cent of the property value. Till six months ago, many banks were offering up to 90 per cent or more to buyers.

In the last few months, residential rates have fallen 20 to 25 per cent from last year. Banks are now worried that if rates fall further buyers may lose interest in the property, especially if they are not living in it.

The revaluation exercise can help banks to invoke a clause in the loan documents that states that if the property value falls below the loan disbursed, banks can ask borrowers to pay the difference upfront. A borrower who is unable to do so can be classified as a defaulter. Banks have, however, not invoked the clause so far.

No Pre-EMI Scheme!

The revaluation process could present some hard realities for some banks that have funded projects under construction. Some builders opted for tie-ups in which the entire loan was disbursed to buyers when they booked. This ensured that the builder was able to get the working capital for the construction at a cheaper interest rate.

The builder, in turn, offered to bear the equated monthly installment (EMI) of the buyer for two or three years, which covers the construction period and the buyer paid for the remaining tenure. That is, for a 20-year loan, the builder would bear the EMI burden for the initial two or three years and the remaining 17-18 years EMIs would be paid by the buyer.

Many under-construction projects, both residential and commercial, have run into trouble in recent times because of tight liquidity conditions.

To read more, please, visit - Business-Standard

"Builders in Pune, thanks a lot for not reducing the property rates by 20 / 25%!"

What is your take on banks "reassessing the value of properties against which loans have been granted"?

Do you admire your builders for holding on the property rates, sacrificing the bookings but not reducing the property rates like Delhi or Mumbai builders?

You can thank your builder in the comments! (Comments Policy)

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