The Covid19 pandemic and the new normal that followed has changed our lives in various ways. It has changed the way we travel, shop, work or even how aware we are of our health. It has also affected lending norms when it comes to home buying. We take a look:
Increased digitization: This is perhaps one of the most significant changes that has taken place due to the Covid19 pandemic.
Digitization had already been underway before the pandemic, but according to the PwC report ‘Mapping the Indian retail lending landscape – vol. 2.0’ the pandemic accelerated the digital transformation journey for lenders across the board . With social distancing measures in place, lenders have increasingly turned to digital channels to facilitate the lending process.
Digital technologies make it far easier and faster to capture the data of applicants, which could have otherwise taken days. Through cloud integration, banks can sync data from credit bureaus and map it with the financial records of the borrower, thus optimising the underwriting process. Also, through integration of alternative credit scoring information, first-time applicants with no credit history can access loans more easily.
Reduced processing time: As a consequence of digitization, processing times of home loans have reduced by a lot. As mentioned, since it is easier for banks now to verify the information provided by the applicant and evaluate their repayment capacity, it does away with face to face meetings between the borrower and bank officials, thus reducing the processing time.
Banks can automate credit checks to speed up the process of assessing a borrower's creditworthiness by using software that pulls data from credit bureaus and other sources to provide a quick credit assessment. Also, since a borrower can digitally upload required documents, it reduces back and forth emails, which also reduces the processing time.
More flexible terms: The pandemic was accompanied by uncertainties in terms of jobs and as a result, many homebuyers were in two minds about whether they should buy a home. To give more confidence to homebuyers, some lenders introduced flexible terms for borrowers so that they could manage their EMIs better. With banks providing the option of longer tenures, or other flexible repayment options like step-up or step-down home loans, where the EMIs increase or decrease with time, borrowers are now able to customise the terms of their mortgage according to their financial needs.
Rationalisation of risk weights: Risk-weighting is a process that banks use to assess the level of risk associated with a particular loan. The higher the risk, the higher the risk-weighting assigned to the loan, and the more capital the bank is required to hold against it.
Typically, a reduction in risk weightings can result in less expensive home loans, as banks can lend larger amounts with less capital and could offer lower interest rates to customers as a result. Therationalisation of risk weights was done to make owning a home easier during the pandemic.
The Reserve Bank of India revised the risk weights for individual housing loans in October 2020 and linked them with the loan-to-value (LTV) ratios until March 2022. The risk weight of 35% was applied to all individual housing loans with an LTV ratio of 80% or lower. In April 2022, the RBI proposed to extend the lower risk weights on home loans until March 2023.
While there has been no further extension of the above for loans worth ₹75 lakh and above, rationalisation of risk weights have definitely made owning a home easier for borrowers.
Stricter focus on the borrower’s creditworthiness: Another significant alteration in lending norms due to the pandemic has been an increased emphasis on the borrower's creditworthiness, where banks and financial institutions thoroughly examine the borrower's credit history, income stability, and employment status before approving a loan.
Due to rising unemployment rates and business shutdowns caused by the pandemic, lenders have become more vigilant and are now scrutinising loan applications more carefully to reduce the risk of defaults and to ensure that borrowers can manage their debt repayments over the long term. This has resulted in more stringent loan approval criteria, making it more challenging for some borrowers, particularly those with less reliable income or employment, to qualify for a home loan.
In summary, the COVID-19 pandemic has greatly affected the home loan market, resulting in changes in demand, digitalization, and lending standards. These changes have had both positive and negative consequences for borrowers, lenders, and the real estate industry as a whole.
Atul Monga, CEO and CO-Founder, BASIC Home Loan
