31/01/2015
Relief for the builder & buyer
The Reserve Bank has taken a positive step by reducing 25 basis points from the repo rate. All sectors will benefit from the interest rate reduction. Let us look at the benefits the housing sector can derive.
It may be a small beginning but it is going to help many home loan borrowers. A quarter per cent and even a ten basis points for a sector like housing wherein the poor and middle class are aspiring to match the price rise all round is a real relief.
The underlying factors of this reduction are:
a) This is a U-turn in the rising interest rate route which was being followed by the country’s central monetary controller, one of the most conservative central banks in the world
b) This is after many rounds of coaxing and cajoling over the last couple of years
c) This reduction signals the sync in monetary policies of both RBI and the Government, which is a good sign in as much as conflicts in the matter can be avoided between the two arms of economic development.
d) The reduction can be a harbinger of a soft interest rate regime.
e) RBI has received a big ‘hug’ from the captains of industry
Housing shortage was being faced by our growing cities for the last quarter of a century. The low and middle class who come to towns and cities in search of jobs face the high cost of rentals as the first hurdle in making their life better. Lack of transport facilities to commute to their work place, if they live in the outskirts where rents are more within their reach, compels them to stay in single-room tenements and use community toilets, many a times without adequate water supply. The steps taken by the government machinery to propel housing segment growth have been inadequate to the challenges of housing shortage. Local bodies were also spending years of litigation in acquisition of land and formation of hosing layouts or building apartment complexes in line with the galloping demand. The local bodies have done precious little to ameliorate the hardship of millions of such migrant population.
A change in the scenario came about when private developers and builders took up house / apartment building as a viable commercial proposition. Assisted by the banking sector, which took housing finance as a loan portfolio builder, and promotional policies propelled by the governments over a period of time, the sector started growing substantially.
The loan portfolio of public sector banks grew enormously overnight to 5-7% of their loan portfolio in the 1990s. However, inadequate follow-up and lack of adequate end use of loans, frauds and NPAs posed control problems at the central bank level.
The interest rate mechanism
The central bank’s control over the interest rate mechanism was total in the 1980s. Rates for lendings by banks for various purposes were specified by the RBI and no bank had any discretion to deviate from this. Once the liberalised approach to bank control came, benchmarks were laid down. Banks were later required to fix benchmark rates.
The real fact is that the banks lend from the deposits they garner and if the cost of deposits is high, they have to jack up the lending rates too in order to have a reasonable margin to meet the administrative and staff expenses.
The repo is a refinance from the central bank to all banks based on certain parameters of each bank. In case there is a funds mismatch, banks go in for repo from RBI. In a situation where there is low liquidity, then repo is resorted to. When banks are flush with funds and credit offtake is low, no repo will be resorted to.
How can the 0.25 % help the housing sector? All banks have to reduce their lending rate by a similar percentage or higher than that. Banks should go in for more repo from RBI. They should also canvass for interest-free and low rate funds. They can also feast on float funds.
Demand for funds will pick up when houses become cheaper. This will also bring down the cost of operation of banks for supervision of construction of individual projects.
How to make housing prices affordable? The interest rate is not the only factor determining the prices of housing projects. Cost of construction, taxes, labour etc., are equally crucial. Yet, by a single stroke, the interest rate can reduce cost to the builders and developers as also the ultimate borrower. The government has been giving tax reliefs by way of interest and principal repayments eligible for tax reliefs which also enthuse investment in housing.
Effect on housing
Most banks have reduced the lending rates. Some banks have passed on the 25 basis points to the borrowers. The ICICI Bank has lowered the housing loan interest to 10.15% (10.10% to women applicants).
The SBI already has special rates for women and the affordable housing segment. Other major banks that have announced reduction in housing loan rate are Central Bank of India, Union Bank and United Bank of India.
The Finance Ministry sources expect up to 0.5 percentage reduction for some sectors and housing can be one of them. A new era in soft interest rate travel may be around the corner.
