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Interest burden: Property investors will have to see if the Reserve Bank of India will change the bank rate in its new credit policy to be announced on Tuesday.

The much-awaited announcement relating to inflation management from the Reserve Bank of India came last week in the form of an increase in the cash reserve ratio (CRR). As expected, the RBI has increased the ratio by 0.5 percentage points, but has decided to do it in a staggered manner. Since the increase is expected to reduce the liquidity from the system and, in turn, put pressure on interest rates, the move is expected to result in a hardening of interest rates. According to reports, the banking sector has already seen a squeeze of Rs. 18,000 crore from the system and the yield on short-term commercial paper briefly touched a level of 10 per cent.

For the property sector, the move will have a significant impact as the interest rate scenario largely depends on the liquidity in the system and the prevailing bank rate. While the liquidity issue has been addressed through the CRR hike, all eyes are now on the bank rate. The Reserve Bank is slated to announce its credit policy for the coming season on April 29.

For home loan borrowers, the tightening money supply situation has already become a part of the system as banks have increased their home loan rates. Most banks and housing finance companies have pegged their rates at around 10-11 per cent and the biggest worry now is if the rates will move up further after the credit policy. According to market sources, banks have also tightened their lending norms and are less generous with their procedures. For instance, there is more stringent quality assessment of builders and property and margin money rules are strictly followed.

Coming back to the relevance of the CRR hike, technically, a measure which sucks away liquidity should push up the interest rate but the good news for home loan borrowers is that banks have restrained themselves from a rate hike.

One of the reasons may be the fact that banks are still comfortable with their liquidity and there is a general feeling that any further hike can dampen the demand for credit.

It is a well known fact that property investors have been forced to cough up an additional amount coming to nearly 15-20 per cent (because of the interest rate moving up from 7.5-8 per cent to 10-11 per cent) on the interest front, besides a 25-40 per cent rise in property rates. This has already had its impact in the form of lower off-take in metros and larger cities. A further rise in interest rate is likely to lower the demand for home loans, which has been the case in the last couple of quarters.

For those sitting on home loans, the current year can be challenging as floating rates have already gone up by at least two percentage points in the last one year. Borrowers have always been complaining that while banks review the lending rate quickly when rates move up, the same enthusiasm is not visible when rates move downwards. So, even if the RBI decides not to alter the bank rate, do not expect your bank to offer you a lower home loan rate. Instead, home loan rates might remain at the current level for at least a couple of quarters.

One of the ways to combat the current scenario is to look for home loan deals. Many property builders have resorted to tie-up mode with banks to woo fresh buyers. In such cases, interest rates have been lower by around 0.5 per cent and on large ticket-sized loans, this could bring in some savings. However, a clearer picture will emerge once the RBI is out with its credit policy.

SRIKALA BHASHYAM

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