There is good news for home buyers. The efforts of the Reserve Bank of India (RBI) to infuse liquidity and lower interest rates have yielded results. Following the RBI’s move and government’s assurance to monitor the liquidity condition on a daily basic, public sector banks have cut interest rates on loans by half to 0.75 percentage points. Now the floating rate home loan will be available in the range of 10.25 to 11 per cent on loans up to Rs 30 lakhs.
In the last couple of days, all the major government owned banks cut their beach mark prime lending rate (BPLR) by 0.75 percentage points. As all the rates are linked to BPLR, the cut in the BPLR will be reflected in the home loan rates. However, the cut in the rate will be applicable to old loans taken on floating interest rates and will not benefit those who have borrowed at the fix rate. That means, the interest rate of a borrower, who has borrowed from a public sector bank, will come down by 50 to 75 basis points, depending on the cut in the BPLR by the bank. This will bring down the equated monthly installments (EMIs) of 20-year home loan of Rs 50 Lakhs by Rs 2,527, i.e., from Rs 51,609 to 49,082.
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However, the rate will benefit all borrowers, who are now planning to buy houses. This is likely to promoted buyers to finally decide to take the plunge-for that dream home. Therefore, it is likely to boost demand in the real estate sector leading to a ramping up of activities. However, developers and consultants feel that the present cut of 0.75 percentage points in the interest rates is not sufficient for the middle income buyers to take the bait and buy a house. Besides, at present, only the government-owned banks have announced the rate cuts. Developers and consultants feel that the activity will really pick up in the reality sector once the main home loan institutions cut their rates.
Another problem is the provisioning norms of the RBI, which increases the cost of funds of loans over Rs 30 lakhs. Because of this, the rate on home loan above Rs 30 lakhs will still continue to be around 11.50 to 12 per cent after the reduction by 0.75 percentage points. Developers feel that to give a boost to the really sector, the RBI should do away with such norms, which was framed to discourages the disbursal of home loans to contain the price rise in the sector. However, now the situation has changed.
There had been a progressive slowdown in demand in India’s residential sector- from home buyers and investors alike- over the last couple of quarters, following the RBI’s multiple interest rate hikes. While property loans were about 7-9 percent about two years ago, they had appreciated to the tune of 12-13 per cent by mid- 2008. High inflation and such steep increases in interest rates forced investors to exit the market and kept many end-users at bay.
The main issue is weather banks are keen to lend to the house buyers. Sanjiv Srivastava, CMD, Assotech, says, as the cost of the funds for the banks still remained high because of high deposits rate in the rage of 10 percentages per annum, it is doubtful that the present announcement of a rate cut will translate into disbursal of loans at the ground level. He argued that unless banks find lending home loans profitable, they would avoid lending.
The difference between deposits and lending rate, in the normal course is 2.5 to 3 per cent. Therefore, the interest rates on home loans will fall in the true sense only when the deposits rate on home loans will fall in the true sense only when the deposits rate fall to around seven percent. And for this, he says, inflation should be corrected to around three per cent.
But, the present rate is a welcome development and a move in the right direction. |
