A Study on the Factors Affecting the Consumers to ...

SUMEDHA Journal of Management

A Study on the Factors Affecting the Consumers to Default the Housing Loan – Dr. M. Vijayakumar*

Abstract The purpose of this study is to find out the root cause for the default of the home loan in India. To capture the market share, banks and housing finance companies are pushing their home loan product to the consumers. Besides, Government is also encouraging the banks and housing finance companies for the liberal selling of the home loan as housing finance industry is related to many other industries. But consumers after receiving the home loan find it difficult to repay the loan which may result in defaulting of the home loan. The present study aims at finding out the reason for the default of home loans in India. The findings of the study reveal that respondents with lower family income default than others. The main reason for default of loan among the borrowers are unforeseen personal/family expenditure, delay in loan sanctioning & disbursement and lack of customer orientation Keywords: Defaulting, Home loan, Market share, Loan sanctioning, Loan Disbursement

Introduction The growth in disposable income, demographic changes such as a growing number of working women who spend more, the growing number of nuclear families, higher income levels within the urban population, the access and availability of bank finance are driving the housing demand in India (Bandyopadhyay, 2009). Mortgage financing industry, which was earlier known as the housing finance industry in India was estimated approximately at US $ 18 billion. The housing finance sector in India has undergone unprecedented change over the past decade. The importance of the housing sector in India can be judged by the estimate that for every Indian rupee (INR) invested in the construction of houses, Rs. 0.78 is added to the gross domestic product of the country and the real estate sector is subservient to the development of 269 other industries. As housing loan is coming under the priority sector lending, Government is giving lot of push to promote the housing activities in India in the form of income tax concessions. But it is found that many people find it difficult to repay the home loan EMIs as the repayment period spread over for 20 years which is mostly uncertain.. So they default their home loans. Default is often associated with "shocks," such as unemployment (Kerry Vandell *

Associate Professor, Department of Management, Mettu University, Post Box no. 318, Mettu, Illu Ababar Zone, Oromia Region. Ethopia. Email: [email protected] 82

Vol.5, No.4, October-December 2016

1995). If the borrower of home loan defaults, he or she sells the house to the mortgage lender at a price equal to the value of the mortgage (instead of the market value of the property) (Yang et al. 1998).

Literature Review Several studies we reviewed found no significant difference in the likelihood of default between men and women (Harrast, 2004; Volkwein & Szelest, 1995; Wilms et al., 1987), even after considering women's comparatively lower average earnings and greater repayment problems (Schwartz & Finnie, 2002). More recent work suggests women take longer to repay loans (Choy & Li, 2006), and a number of studies found evidence that men are more likely than women to default on loans (Flint, 1997; Podgursky et al., 2002; Woo, 2002a, 2002b). Regarding the family influence on the default Volkwein and Szelest (1995) found that the probability of default increased 4.5 percent per dependent child. Being a single parent was also associated with a greater risk of loan default (Volkwein et al., 1998). Being separated, divorced, or widowed was found to increase the probability of defaulting by more than 7 percent (Volkwein & Szelest, 1995). Not surprisingly-given the positive relationship between education and socioeconomic status-consumers with higher levels of formal education were less likely to default than others (Choy & Li, 2006; Volkwein et al., 1998; Volkwein & Szelest, 1995). This is true in relation to the mother's as well as the father's level of education (Steiner & Teszler, 2003, 2005). Low-income consumers also report feeling more burdened once their loan repayments begin, and some evidence suggests this reaction is intensifying (Baum & O'Malley, 2003). Generally, the higher the family income the lower the likelihood of default (Knapp & Seaks, 1992; Wilms et al., 1987; Woo, 2002a, 2002b). Finally, several researchers have explored the effects of loan counseling or consumer education programs and have found they appear to be related to lower rates of default (Podgursky et al., 2002; Seifert & Worden, 2004; Steiner & Teszler, 2005; Wilms et al., 1987).

Methodology The research design adopted for the study is descriptive design. The study is based only on the opinion of the consumer. The sampling technique used for this study is convenience sampling. It involves selecting cases that are easiest to obtain for sample. The sample selection process is continued until your required sample size has been reached (Saunders et al. 2009). Under convenience sampling respondents are selected on the basis of proximity, ease of access and willingness to participate (Timothy 2005).For this research the researcher has taken 531 samples, in accordance to the time limitation. The study was carried out in the Erode District of Tamil Nadu, India among the consumers who have availed home loan from commercial banks.

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Objectives 1.

To study the socio-economic characteristics of the consumers who availed home loan.

2.

To find out the causes for the default of home loans.

Analysis and Interpretation Misuse of the Housing Loan Amount Housing loans are disbursed in installments in a phased manner to the consumers. And the loan installments received so are expected to be used for the core purpose. However, it does not happen in many cases. There may be chances for deviation of the loan purpose namely, misuse of the loan amount. It is agreed that mis-utilization of the loan amount availed in installment occur delay in disbursement of the loan amount, which results in default of home loan. In the present study, the end use of the loan amount availed in installment are analysed and presented in the Table 1.1. Table 1.1 : End Uses of Housing Loan Amount

Bank Category S. No 1. 2. 3. 4.

Purposeof Utilisation Construction Purpose Redemption of Debts Short Term Investment Domestic Consumption Total

Number of Borrowers

PSBs

%

OPSBs

%

NGPS Bs

%

Total

%

235

72.53

71

58.68

70

81.40

376

70.81

47

14.51

14

11.57

8

9.30

69

12.99

25

7.71

10

8.26

0

0

35

6.59

17 324

5.25 100

26 121

21.49 100

8 86

9.30 100

51 531

9.60 100

In total, 70.81 per cent of the respondents used the loan amount for the intended purpose i.e., construction purpose, whereas 12.99 per cent of the respondents used it for redemption of prior debts incurred in connection with their house construction. However, 72-81 per cent of the consumers of PSBs(Public Sector Banks) and NGPSBs(New Generation Private Sector Banks) used the installment amount for construction purpose whereas only 58.68 per cent of the consumers of OPSBs(Old Private Sector Banks) used the loan for intended purchase.

Repayment Behaviour Recovery of credit is of utmost importance for the financial health of banking institutions in particular as so the timely payment of credit makes the bank to lend it to the new customer. As such 84


defaulters resulting in mounting overdue cause peril to the credit institutions. Default occurs, as soon as the borrower misses a scheduled payment. The number of non-payment periods varies from lender to lender and with the lender's willingness to work with non-paying borrowers and renegotiate the loan terms. Failure to repay mortgage financing (default) varies substantially with the type of loan and borrowers (Simons, 1990). On the other hand, default is also costly to the borrowers. On an individual level, a borrower who defaults is penalized with a lower credit rating, fewer opportunities for future home purchase, and sometimes even, reduced future loyment or advancement opportunities (Giliberto and Houston, 1989). There is also intangible cost to individual borrowers, such as emotional distress experienced when they decide to default. Default is also costly to borrowers collectively. When default risks are not properly understood, lenders charge mortgage interest rate premiums to compensate for the above normal risk represented by the borrowers with certain characteristics. In extreme situations, borrowers may be denied loans altogether because they are residents of areas considered risky, regardless of their individual creditworthiness. In the present study, repayment behaviour is categorized into Not Defaulting and defaulting. The distribution of respondents based on the repayment behaviour is presented in the Table 1.2. Table 1.2 : Repayment Behaviour Bank Category

S.No 1. 3.

Number of Borrowers

Repayment Behaviour Regular Defaulter Total

PSBs 224 100 324

% 69.14 30.86 100

OPSBs 103 18 121

% 85.12 14.88 100

NGPSBs 75 11 86

% 87.21 12.79 100

Total 402 129 531

% 75.71 24.29 100

The survey reveals that majority (75.71%) of the respondents' repayment behaviour is good. Defaulters accounts for 21.47 percent. However, PSBs have the defaulters to a larger extent with 30.86 per cent than the OPSBs (14.88%) and NGPSBs (12.79%). Table 1.3: Age * Repayment behaviour - Cross tabulation

Age

Not Defaulting

Defaulting

Total

Below 30

26

6

32

30-50

330

111

441

51-60 Above 60

32 14

10 2

42 16

402

129

531

Total

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The survey reveals that middle aged group particularly below 30 age group respondents are more defaulting (25.17 %) followed by 51-60 age group of respondents who defaulted nearly (23.81 %). Table 1.4 : Inocme * Repayment Behaviour - Cross Tabulation

Monthly Income Upto 35 K 35 to 70 k 75K – 1 lakh Above 1 lakh

Age

Not Defaulting

Defaulting

Total

80 79 173 70

40 31 51 7

120 110 224 77

402

129

531

Total

In total, 33.33 per cent of the respondents from under Rs 35000 income group default their loan followed by 28.18 percent of the respondents from Rs 35000 to Rs 70000 income group category. The result clearly shows that respondents with lower income category are defaulting their home loans. Table 1.5 : Reading of the loan agreement * Repayment Behaviour - Cross Tabulation

Not Defaulting

Defaulting

Total

Fully reading

23

3

26

Partially Reading

120

26

146

Not reading

259

100

359

402

129

531

Reading Status Total

It can be understood from the table 1.5 that 27.86 percent of the respondents who are not reading the loan agreement document default their loan followed by 17.80 per cent of the respondents who partially reads the loan agreement defaults their loan. This clearly indicates that respondents who are not reading the loan agreement documents are defaulting their home loan.

Reasons for Default Default occurs when a debtor has not met the legal obligations according to the loan agreement, i.e., has not made a scheduled payment, or has violated a loan condition of the loan agreement. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his loan. There may be lot of reasons for the default of the loan by the borrower. But the present study is confined to unforeseen expenditure, Loss of job and error omission to pay EMI. The profile of defaulting consumer indicates that borrowers who sought counseling were married, were in their mid- 30s, were employed full-time, and had at least two dependents. Primary reasons for the 86


default included a reduction in income, job loss, and marital disruption. The majority of respondents (75.2%) were homeowners of 5 years or less, which is similar to other studies reporting that homeowners defaulting on mortgage loans are likely to experience financial difficulty in the first 5 years of ownership (O'Neill et al., 1995; von Furstenberg, 1970; von Furstenberg & Green, 1974). The distribution of reasons for default of loan is presented in Table 1.6 Table 1.6 : Reasons for Default Number of Respondents Category S. No Reasons for Default 1. Unforeseen Expenditure 2. 3 4. 5. 6. 7. 8. 9.. 10. 11. 12. 13. 14. 15.

Loss of Job Delay in Sanctioning Lack of Consumer Orientation Delay in Disbursement Interest Rates Mode of Repayment Lack of Customer Care Unsuitable Repayment Period High EMI High Down Payment Release of Installment Inadequate Loan Amount Increase in Medical Bills Cumbersome Formalities

Neither Agree nor Disagree

Highly Agree

Agree

19(14.73) 2(1.55) 16(12.40)

34(26.36) 5(3.88) 38(29.46)

29(22.48) 15(11.63) 31(24.03)

13(10.08)

16(12.40)

2(1.55) 27(20.93) 02(1.55) 08(6.20)

Disagree

Highly Disagree

Total

27(20.93) 88(68.22) 29(22.48)

20(15.50) 19(14.73) 15(11.63)

129 129 129

9(37.98)

42(32.56)

09(6.98)

129

8(6.20) 66(51.16) 04(3.10) 10(7.75)

67(51.94) 23(17.82) 82(63.57) 39(30.23)

49(37.98) 096.98) 17(13.18) 41(31.78)

03(2.33) 04(3.10) 24(18.60) 31(24.03)

129 129 129 129

15(11.62)

26(20.15)

51(39.53)

31(24.03)

06(4.65)

11(8.53) 07(5.43) 15(11.63) 26(20.16) 05(3.88) 6(4.65)

34(26.36) 27(20.93) 18(13.95) 35(27.13) 13(10.08) 7(5.43)

4131.78) 18(13.95) 67(51.94) 18(13.95) 07(5.42) 23(17.83)

22(17.05) 51(39.53) 18(13.95) 30(23.26) 74(57.36) 34(26.36)

21(16.28) 26(20.16) 11(8.53) 20(15.50) 30(23.26) 59(45.74)

129 129 129 129 129 129 129

The study reveals that nearly50 per cent of the respondents are found to be defaulters due to problem in interest rates, delay in sanctioning of loan amount, inadequate loan amount availed, lack of timely information and unforeseen personal/family expenses. Among the above, problems in interest rates is perceived as the prominent reason for default. Table 1.7 exhibits the mean scores of each reason for default of the housing loan among the borrowers and its respective 'F' statistics. The important reasons for default in repayment in the PSBs are delay in sanctioning and delay in disbursementsince its mean score are 2.95 and 2.94. In the case of OPSBs, these reasons are lack of customer care and delay in disbursement is identified since their mean scores are 3.20 and 3.19. In NGPSBs, delay in disbursement coupled by unforeseen expenditure is regarded since their mean scores are 3.26 and 3.10.

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Table 1.7 : Reasons for Default - One Way ANOVA Mean Scores among the Borrowers S. No 1. 2 3 4. 5. 6. 7 8. 9. 10. 11. 12. 13. 14. 15.

Factors

PSBs

OPSBs

NGPBs

FStatistics

Unforeseen Expenditure Loss of Job Delay in Sanctioning Lack of Consumer Orientation Delay in Disbursement Interest Rates Mode of Repayment Lack of Customer Care Unsuitable Repayment Period High EMI High Down Payment Release of Installment Inadequate Loan Amount Increase in Health Care/Medical Bills Cumbersome Formalities

2.86 2.20 2.95 2.76 2.94 2.75 2.69 2.80 2.17 2.72 3.12 2.43 2.46 2.12 2.45

2.96 2.98 2.66 2.88 3.19 2.72 2.66 3.20 2.32 2.56 3.05 2.35 2.31 2.02 2.13

3.02 2.56 2.83 2.53 3.20 2.68 2.47 2.84 2.07 2.64 2.93 2.29 2.31 2.25 2.11

2.345* 1.896 2.422* 1.717* 2.315 0.101 1.155 4.589* 1.507 0.744 0.606 0.642* 1.165 1.456 1.866

* Significant at five per cent level. Table 1.8 : Major Factors Leading to Default in Repayment of Loan Factors

Self Factors

Pre Loan Sanction Factors Post Loan Sanction Factors Bank Factors Product Factors

Factor Loading

Reliability Co efficient

Eigen Value

Percentage of Variance

Unforeseen Expenses Increase in Health Care/Medical Bills Loss of Job Delay in Sanctioning Delay in Disbursement Cumbersome Formalities Release of Installment HighEMI HighInterest Rates Lack of Customer Care Lack of Consumer Orientation HighDown Payment

0.554 0.497

0.8723

1.910

14.689

0.8113

1.403

10.789

0.7547

1.259

9.686

0.7214

1.047

8.057

0.7012

1.036

7.966

Inadequate Loan Amount Mode of Repayment Unsuitable Repayment Period

0.513 0.486 0.345

Variables

0.438 0.619 0.541 0.266 0.564 0.512 0.389 0. 680 0.315 0.363

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The five factors viz., self-factors, pre-loan sanction factors, post-loan sanction factors, bankfactors and product-factors have effect on the repayment behaviour among the borrowers to the extent of 51.19 per cent. The most important factor is self factor which includes three attributes (such as unforeseen expenses, increase in health care/medical bills and loss of job) with the reliability coefficient of 0.8723. The Eigen value and the percent of variations of this factor are 1.910 and 14.689 per cent respectively. However, among the above three, unforeseen expenses are estimated to be the most important contributing factor.

Results and Discussion Majority (75.71%) of the respondents' repayment behaviour is good whereas defaulters accounts for 21.47. However, Public Sector Banks have the defaulters to a larger extent with 30.86 per cent than the old private sector banks (14.88%) and New Generation Private Sector Banks (12.79%) This may be because of the lenient approach by the public sector banks when compared to the Old Private Banks and New Generation Private Sector Banks. Problems with the interest rates, delay in sanctioning of the loan amount, inadequate loan amount availed, lack of customer care and unforeseen personal/family expenses are the major reasons for the default of the loans by the consumers. Among the above, problems in interest rates is perceived as the prominent reasons for default. The F-Statistics showed that the important reason for default of loan among the borrowers are unforeseen personal/family expenditure, delay in sanctioning & disbursement and lack of customer orientation since the respective 'F' statistics are significant at five per cent level. Further, the Factor Analysis indicates that the self-factor is the most important factor which includes three attributes (such as unforeseen expenses, increase in health care/medical bills and loss of job). However, among the above three, unforeseen expenses are estimated to be the most important contributing factor.

Conclusion This study mainly aims at find out the factors affecting the consumer to default their home loan.Problems with the interest rates, delay in sanctioning of the loan amount, inadequate loan amount availed, lack of customer care and unforeseen personal/family expenses are the major reasons for the default of the loans by the consumers. Besides, consumers with lower income are prone to defaulting. Most of the consumers of housing loan of the scheduled commercial banks do not read the loan agreement meticulously which results in defauling of their loan. So, sufficient time should be given to read and understand the loan agreement or clarifications about the loan agreement. The study found that consumers of home loans of banks are found with problems at the later stage of the product purchase viz., during the repayment period of the loan. Efforts must be made to solve this problem from the Government as well as bank side. 89


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