Developers want banks to cut rates
Sep 30, 2015
Source : TNN

NEW DELHI: The sharp cut in repo rate is expected to give a fresh lease of life to the struggling real estate sector while lowering of risk weight for affordable housing loans is likely to add to the recovery. 

Developers, who have been saddled with huge inventory, now want banks to cut their lending rates, particularly when the festival season is round the corner.
At present, the minimum risk weight applicable to individual housing loan is 50%. The RBI said it is proposing to reduce the risk weight applicable to lower-value but well-collateralized individual housing loan, in an attempt to improve "affordability of low-cost housing" for economically weaker section and low-income group and give a fillip to "housing for all". 
The general perception in market is that banks must cut lending rates to ensure a recovery in the real estate sector.
"We are hopeful that banks will take the cue and pass on the benefit to the end-user, which will trigger a rise in demand for housing ahead of the festive season," said Navin Raheja, chairman, National Real Estate Development Council.

SBI has already cut its base rate by 40 basis points to 9.3%. ICICI Bank has also expressed its intent to cut rate in due course. HDFC Bank cut its rate in the first week of September to 9.35%. Developers, however, feel rates should fall below 9% to enthuse buyers.

The 40 basis points cut effected by SBI will give a relief of only 2.8% in EMI to Rs 45,955 on a Rs 50 lakh loan for 20 years. A half a percentage point rate cut (50 basis points) will lead to reduction in EMI by only 3.5%. This means, on a loan of Rs 50 lakh for 20 years, EMI will come down from Rs 47,262 to Rs 45,631 if the interest rate goes down from 9.7% to 9.2%.
So, buyers feel that interest rate should be cut by at least one percentage point (100 basis points), which will give a relief of 6.8% in EMI. In 2015 calendar year, RBI has already cut repo rate by 1.25 percentage points in four tranches, but so far, banks have cut their rates by around 0.5 percentage points only.
Another key issue is whether developers will reduce prices or not. They say there is no scope to cut price as they are selling at the lowest possible price. "At the present price level we are hardly making any money," said Getamber Anand, president of Confederation of Real Estate Developers' Associations of India. Underlining the importance of availability of cheap fund, Anand said RBI must impress upon banks to cut lending rates. 
However, developers and investors are saddled with large inventory. So, in the coming festive season, developers in markets such as Mumbai, Banguluru and Pune are likely to offer large discounts and freebies to push sales and clear inventory.

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