News & Views on Indian Real Estate

Thursday, August 14, 2008

Increasing bad loans a worry for Indian banks

The rising bad loans are set to pose a huge challenge in the next few years for the banking and finance industry. Banks have already stopped or tightened lending norms for consumer finance and auto loans for fear of higher defaults. Rising interest rates have increased the possibilities of defaults, particularly among customers holding credit cards.Analysts say bad loans will be a major challenge for domestic banks even as regulators prepare to ease restrictions on foreign banks operating in India in 2009.Reserve Bank of India has no choice but to hike rates if inflation is at 12% and that will be a problem because if people have taken a loan of Rs 50 lakhs and paying 7% interest two years ago, now they are paying 14% which means paying double the interest now. This in turn, would lead to lesser number of people defaulting on their home loans in India because, unlike the US, the home-loans market in India is a “user’s market.