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What is in store for home loan borrowers
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Will the CRR hike impact home loan rates?
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After the Reserve Bank of India (RBI) decided on April 29 to raise the cash reserve ratio (CRR) by 25 basis points from May 24, a pertinent question on the lips of every stakeholder in the real estate industry in the State is will the banks, both private and public, increase the interest rates on housing loans.
Kozhikode has been riding on a real estate boom for the past few years. However, now, the inflation rate is above seven per cent, burdening the common man with high prices.
To control the runaway inflation, the RBI increased the CRR, the portion of money banks should keep aside. The CRR will touch 8.25 per cent, pulling out another Rs. 9,000 crore from the bank-lending system.
On April 17, the RBI announced increasing the rates by 50 basis points in two stages. With the three stages, Rs. 27,000 crore will be sucked out of the lending system.
However, the RBI has left the key lending and borrowing rates unchanged.
On Thursday, Union Finance Minister P. Chidambaram said the CRR hike would not have any adverse impact on the housing loan sector.
He expected that housing loans would grow as the RBI had already made changes in the housing loan portfolio.
Nityananda Kamath, secretary of the Kerala Builders’ Forum Calicut chapter, says that the increase will not have an unfavourable impact on the realty sector in tier-3 cities such as Kozhikode.
Ripples in Kochi
It will have no impact elsewhere in north Kerala either.
However, the RBI’s move will not go down well in metros and may create ripples in Kochi, which has over-performed in the real estate sector.
Even if the banks increase interest rates by 0.25 or 0.5 percentage points in the near term, the genuine end-customer who is willing to repay the housing loan will not be deterred.
“At least 90 per cent of the clients buy apartments for their own requirements. Real estate is the best form of investment these days. Lots of new builders have come up in Kozhikode city,” Mr. Kamath says.
Nevertheless, people will think twice before investing, considering that profitability has also come down, he says.
Minor impact
K.K. Ajith Kumar, Chief Manager, Federal Bank Ltd., says that the CRR increase will have a minor impact in Kozhikode.
Normally, when the CRR is increased, the banks will have to seek avenues to increase volumes in sales. The CRR increase obviously will decrease the distribution of funds. The hike has to chime with the proposed targets of the banks.
Hence, it is expected that lending rates of housing, vehicle and personal loans will go up. The proportion of housing loans is higher than that of other types of loan, touching nearly 40 per cent in Kozhikode city.
Generally, the CRR hike will not augur well for the real estate sector. Homebuilders will be reluctant to take loans at higher rates. “The impact will be seen in the short and medium term,” Mr. Ajith Kumar says.
It is true that many people have invested surplus funds in the real estate sector, besides gold and shares. Even after the stock market crashed in January, investors have not returned to banks to park surplus funds. It can be attributed to the low interest rates offered by them on term deposits.
The depreciation of the dollar has compelled Non-Resident Indians to park their funds in banks abroad. However, Mr. Ajith Kumar says genuine homebuilders will not shy away from taking a housing loan even if the banks raise the interest rates by 0.5 percentage points.
But builders will seek alternative options rather than rely on banks.
Banks may also devise ways and means to meet the challenges arising out of the CRR hike.
“Either banks will have to reduce interest rates on deposits or increase those on loans on account of the CRR hike,” says S. Jayamohan Nayar, Area Business Development Manager, Union Bank of India.
The real estate sector will have a tough time ahead. Growth in housing loans is likely to come down if the banks decide to hike interest rates.
Loans showed a quantum jump of 20 per cent when housing loan rates were reduced earlier. It can happen the other way round too, he says.
Curbs
The CRR hike is also likely to make banks restrict loans to some projects. “Project advances for commercial establishments and apartments will be curtailed. It is not that banks lack funds. At present, there are no restrictions on any type of loans,” Mr. Nayar says.
However, Mr. Kamath feels that property builders in Kozhikode will not have to experience a meltdown in the real estate industry.
BIJU GOVIND
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