While the financial sector is facing unprecedented turmoil the world over, the Indian banking sector is insulated from the toxic elements causing this crisis. Thanks to the insistence of the Reserve Bank of India's adherence to prudential norms, the Indian banks' assets are not contaminated as they are in those countries, which relied heavily on the market theology. Interventions by the regulator were often disliked while the funds were flowing across the globe without barriers. Regulators were silent spectators until much damage was done. Those who disliked and denounced nationalised banking are now forced to nationalise their banks. Banking in India is on a firm footing; major portion of banking transactions are handled by banks owned by the government and regulated by the Central bank.

One of the professors from London School of Economics has recommended the total de-nationalisation of banks in India by 2009, before the banks celebrate the fortieth anniversary of bank nationalisation. It is ironical that banks in UK and USA would be making preparations for celebrating their first anniversary of nationalisation, when public sector banks in India celebrate their fortieth anniversary. Government ownership, despite the bureaucratic hindrances, has given to the banks a sense of direction besides imparting stability, as perceived by the customers.

The achievements of the Indian banks in many segments of banking are indeed remarkable. However, there are some areas, which cause concern. Growing non performing assets (NPAs), which was considered as a menace some time back, is controlled now. Net NPA ratio for the banking sector is around one per cent only. On the domestic front, a massive programme for ensuring inclusive growth for the poor, untouched by the banks so far, is being implemented by banks all over the country. This is a programme, aimed at empowering the poor, by extending credit facilities to them at affordable cost. At the international level, cross border acquisitions of banks and corporate giants speak volumes about the maturity of Indian bankers. Foreign operations of Indian banks would have resulted in some of their assets getting contaminated. But the disclosures made by the banks concerned indicate that such bad assets are not large enough to cause undue anxiety.

Exposure to housing sector
Banks' exposure to sensitive sectors, specially the capital market, is within the prudential norms. Housing finance is one area which has attracted banks to lend somewhat excessively, after the introduction of financial sector reforms. Housing, being a basic requirement and the dream of every middle class family , it is but natural that banks have considered housing finance as a desirable destination. But the rate at which these advances are growing is causing a little concern. Though the problem of sub-prime lending, which the banks abroad are facing, has not manifested so far, it is desirable to regulate the copious flow, which is getting concentrated in a few metropolitan centres.

Housing loans lent by banks have increased from Rs.9631 crore in 1998 to Rs.128,923 crore by March 2007. The share of housing loans in total lending has increased in total lending sharply from 2.92 per cent to 11.76 per cent during this period. The number of borrowing accounts has risen from 11 lakh to 50 lakh during the decade. Five years ago, in its annual report 2002-03, the Reserve Bank of India has expressed its concern in a special section: Housing Finance-New Driver of Bank Credit. Referring to the huge increase in the volume of housing loans and the increase in the number of borrowing accounts, the report had cautioned: "the cause for potential worry is that by lowering the lending rates, banks are approaching the cost of funds." The rate of interest was reduced and banks were making all efforts to woo the potential customers by offering interest rates sometimes going below the Prime Lending Rate.

There was stiff competition among banks in expanding their portfolio under housing finance. Floating rates were introduced, offering relatively lower rates compared to the fixed rates, to attract gullible customers. Floating rates did not come down during the last decade, making the borrowers to pay more in terms of the monthly or quarterly instalments. As far as the range of interest rates at which the amounts are lent, the Reserve Bank's publications furnish the data pertaining to advances above Rs.2 lakh only. Based on the available data, it is found that the volume of loans lent in the interest range of 10 to 12 per cent, is Rs.40,073 crore, which accounts for 19 per cent. About 70 per cent of the advances were made in interest bracket of 6 to 10 per cent as on March 2007.

Areas of concern
Bulk of the housing loans- as high as 88 per cent - is lent in urban and metropolitan centres only. Metropolitan centres have 16 lakh borrowing accounts receiving Rs.147,199 crore of advances. In urban areas, 14 lakh borrowers obtained Rs.55,859 crore of housing loans. Chances of violent fluctuations in the real estate prices are much more in metropolitan centres than in smaller towns. Banks run the risk of the value of the securities they hold going moving irrationally. Some of the new generation banks lend even 100 per cent of the value of the flat to be purchased by young borrowers from the IT sector. The target-oriented branch managers are likely to dilute the procedural formalities to reach the target under housing finance.

Smaller towns and villages are virtually neglected by banks as far as housing loans are concerned. The loan requirement being comparatively low, bankers do not take much interest in such loans. Housing loans lent by banks in the rural areas is less than one per cent of total housing loans; amount lent is Rs.20,000 crore availed by about 8 lakh borrowers. For people living below the poverty line, there are state-subsidised lending schemes under different populist programmes. But there are other groups of people, who need finance to build new houses.

High rise buildings do not come up in villages or small semi-urban centres. However, with the commercialisation of agricultural economy in certain pockets, where commercial crops are grown, demand for housing loan emerges, if there were an agency to provide the loans required. It is necessary that the banks should assess the pent up demand for housing finance outside urban areas. This could be not only a good business proposition but also a means of minimising the risk of lending to urban borrowers, whose assets are susceptible to huge variations in value, influenced by the positive or negative features of urbanisation.

Inter-district variations in the deployment of housing loans are very glaring. Less developed districts are neglected by banks in lending for house construction. Because of economic backwardness, demand for credit may itself be low in many cases. Banks have to formulate schemes tailor-made to suit the economic conditions of the areas. There are a large number of self-employed persons in the unorganised sector, who do not get housing loans from any financial institution. They could be targeted by linking their savings to small amounts of housing loans.

Among the districts, Greater Mumbai district gets highest volume of housing finance, Rs.32,073 crore with the borrowing accounts reaching 81 lakh. Over 80 per cent of the housing loans in Maharashtra are lent in this district only. Greater Mumbai, where 50 per cent of the population is reported to be living in slums, banks have to be pro-active in extending housing loans, without diluting the prudential norms. They have to ensure that easy availability of bank loans do not contribute to artificial rise in the value of the housing properties. Even in the extended suburbs of Mumbai, it is reported that a single bedroom flat costs Rs.45 lakh, pushing such flats beyond the reach of theb low income earners. Tax concession in terms of permissible deductions of the bank interest paid, does not help the average wage-earners in such cases.

Migration of housing loan accounts to different banks is a common feature among the new generation banks. The differences in the interest rates under the floating rate regime tend to facilitate this trend. For a small temporary gain in interest amount, many borrowers change their banks. According to some studies, the average age of the borrowers of housing loans has come down to the 30 to 35 year group. And they are more prone to hop from bank to bank, as the young software workers change their jobs frequently.

Housing loans are normally considered as totally secured advances. But there are instances of several flats coming up for sale; after obtaining the court verdicts, prospective bidders seek to settle at very low prices for the 'used houses.' Such cases are on the increase in some districts. Traditionally, investment in housing is considered as a provision for spending the retired life in a place of one's choice, having worked in different places during the working life. The interest burden should not be very heavy at that age leading to defaults in repayments resulting finally in dis-possession of the house. And it is too early to pronounce a judgment on the usefulness of reverse mortgage schemes in the Indian context.