Sub-prime mortgage has recently been doing the rounds at smoke breaks and tea time conversations. Each individual seems to have their own perception of what subprime mortgage is. Let us come to terms with it through this article.

What exactly is sub-prime mortgage?
It is basically money lent by a lender or bank to an individual who needs to pay up loan instalments he has defaulted to another bank. Such a person with a bad credit history known as a sub-prime borrower gets a reprieve through the services of these banks or lenders who see a huge market for sub-prime mortgage.

A peek into US subprime mortgage history
When the housing boom between 2001 and 2005, happenned in the United States due to the low interest rates among other factors, property prices saw a phenomenal hike. Hence, many of the ecomically weaker borrowers who had defaulted instalments saw a dramatic rise in their property value.

The lenders and banks targeted this section of the market sensing the market potential of this rise in property value. They lent money for these individuals to pay back their loans. The picture was rosy for these lenders until the bubble burst and the property market crashed. Many of these sub-prime mortgage lenders had to declare bankruptcy.

US Vs. India sub-prime mortgage scenario
The borrower market in India is more non-prime than sub-prime. Lenders in the unorganized money lending sector and small local banks available in the nooks and corners cater to the large population of economically weaker sections who have a long standing relationship with them.

To give better clarity consider the case of the local shopkeeper who borrows in the morning and pays back in the evening. He is more comfortable with the daily lending arrangement. The local vendor may borrow 90Rs. in the morning and pay back 100Rs. Even though he pays back with a lending interest of 4000 per cent per annum it works out better from a practical viewpoint than take a loan from a bank which charges an interest rate of 40 -50% on a long term loan. The former arrangement serves his purpose better.

Why banks cannot penetrate the non-prime market?
The unorganized lending market which lends to individuals for an emergency may charge exorbitant time based interest rates on relatively small amounts of borrowed money. The borrowers may pay back the amounts at the first available opportunity to ensure continuous cash flow and to cut down interest. On the other hand the lenders could use muscle power to get back the money.

Banks like the ICICI are finding it difficult to penetrate this non-prime market and the number of defaulters are on the increase hence forcing the bank to remove the loan options for this sector. The recovery agents can only push the borrowers so much and anything more can bring in criticisim for the bank’s reputation.

In India, a borrower, once a defaulter is considered always a defaulter. Banks are generally skeptical to lend to borrowers with a poor credit history and even with security it can still be difficult. Hence indiscriminate lending and continous defaulting seems a distant possibility in India, which alone can cause a sub-prime mortgage crisis.