Factors Driving Demand and Default Risk in Residential Housing Loans: Indian Evidence
National Institute of Bank Management (NIBM)
affiliation not provided to SSRN
August 31, 2008
This paper empirically examines the functional role of various micro and macro economic as well as situational factors that determine residential housing demand and risk of borrower default. Using 13,487 housing loan accounts (sanctioned from 1993-2007) data from Housing Finance Institutions (HFIs) in India, we investigate the crucial factors that drive demand for housing and its correlation with borrower characteristics. Next, we examine housing loan defaults and the major causative factors of the same. Our empirical results suggest that borrower defaults on housing loan payments is mainly driven by change in market value of the property vis-a-vis the loan amount and EMI to income ratio. A 10 percent decrease in the market value of the property vis-a-vis the loan amount raises the odds of default by 1.55 percent. Similarly, a 10 percent increase in EMI to income ratio raises the delinquency chance by 4.50 percent. However, one cannot ignore borrower characteristics like marital status, employment situation, regional locations, city locations, age profile and house preference which otherwise may inhibit lender to properly assess credit risk in home loan business as our results show that these parameters also act as default triggers.
Keywords: Housing Demand, Risk Management, Financial Institutions and Banks
JEL Classification: R21, G32, G2working papers series
Date posted: March 18, 2009 ; Last revised: June 10, 2009
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