According to recent finance ministry data that captures the performance of public sector banks, instances of home loan defaults contributing to gross non-performing assets (NPAs) was the highest in the category of loans up to Rs 2 lakh. The figure stood at six % in 2010-11, slightly lower than 6.4 % in 2009-10.

“Since borrowers in this category primarily belong to the low-income group, the rise in rates has hurt their repayment ability,” said a senior State Bank of India official. The bank’s average loan size is around Rs 12 lakh.

The rise in the easy monthly instalments has been substantial. RBI has increased policy rates 10 times in the last 15 months. The substantial rise in monthly instalments, coupled with inflation, lead to an erosion in repayment capacity.

As loan amounts rose, instances of defaults declined. For Rs 2-5 lakh, gross NPAs (as a percentage of the home loan portfolio) were 4.84 % (5.83 % last year). In the Rs 5-10 lakh bracket, it was 3.68 %. At 1.56 %, it was the lowest for loans above Rs 25 lakh, according to the data.

According to bankers, in slabs up to Rs 10 lakh, most home loan borrowers were eligible for loans of up to 50-60 % of the value of their property. Banks decide the loan amount based on assessment of repayment capability. As a result, borrowers resort to private sources, including moneylenders to meet their requirement. In times of crises like job loss or a bad crop, private creditors are able to exercise greater pressure for recovery, compared to banks. This directly impacts borrowers’ repayment commitment to banks.

Most banks have raised interest rates by at least 200 basis points since October 2010. Inflation measured by the wholesale price index has remained above RBI’s comfort level for more than a year. In addition to the rise in rates, high inflation has also dented the real income of small borrowers.

Loans of above Rs 25 lakh are taken by borrowers who are salaried employees or run established businesses, indicating a greater ability to absorb a rise in easy monthly instalments. The loan-to-value ratio could be higher by 75-80 % in these cases (loans above Rs 10 lakh), said an executive of a Mumbai-based public sector bank.