June 07, 2018

The decision of the Reserve Bank of India (RBI) to hike repo rates by 25 basis points, indicating tightening in the interest rates, could make all loans including home loans costlier, but the revision of housing loan limits for priority sector lending (PSL) from existing Rs 28 lakh to Rs 35 lakh may lead to reduction in the interest rates on home loans up to Rs 35 lakh.

In its policy decision, RBI, in order to give a fillip to the low-cost housing for the Economically Weaker Sections and Lower Income Groups, it decided to revise the housing loan limits for eligibility from existing Rs 28 lakh to Rs 35 lakh in metropolitan centres, and from existing Rs 20 lakh to Rs 25 lakh in other centres, provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed Rs 45 lakh and Rs 30 lakh, respectively.

Anuj Puri, Chairman - ANAROCK Property Consultants- said that the decision to increase the limit would be a big boost for the first-time home buyers who are looking to buy properties in the affordable segment. Besides getting subsidy benefits of Rs 2.68 lakh from the central government under schemes like Pradhan Mantri Awas Yojna, owning a house in the metros will soon become a reality for many.

As banks have to lend around 40% of its total loan to priority sectors like micro enterprises, borrowers from weaker sections, and agriculture sectors among others where default rates are high, they (banks) tend to lend aggressively to those priority sectors where default rates are low. The default rates in housing loans in the range of Rs 10 lakh to Rs 35 lakh is comparatively low. Therefore, bankers say the RBI's decision would prompt banks to lower rates on small ticket home loan segment to increase market share.

However, on the issue of rate hike by RBI, developer communities are critical. Jaxay Shah, President, CREDAI National said, "The decision to hike the Repo rate by 25 basis points may lead to suppressed growth in the Indian real estate sector which has shown substantial resilience over the last 18 months." He said Indian realty requires lower rates to provide further thrust to 'Housing for all by 2022' which would also enable the sector to spearhead the growth of the Indian economy.

On the other hand, justifying the rate hike on account of inflationary trends, global hardening of interest rates as also petroleum prices moving upwards, Niranjan Hiranandani, President NAREDCO, said the hike of 0.25 basis points in the repo rate would not make a major difference to real estate. However, he added that in the long run, "we would prefer rates coming down".

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