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No change in sight for sub-Rs 20 lakh home loan rate

Contrary to expectations, home loan rates for sub Rs 20 lakh has not come down despite Reserve Bank announcing lower provisioning requirement for such loans by banks

Pooja Gawde

14 Aug 2007

Home seekers' hopes were raised when RBI recently asked banks to set apart less capital while giving out housing finance below Rs 20 lakh. Ideally, this move would have resulted in lower costs for banks to hand out sub-Rs 20 lakh loans, and hence lower interest rates for such loans. However, this has not happened.

'It is not realistic to have a separate set of parameters for home loans below Rs 20 lakh. Home loan rates are decided upon holistically, based on inflexible parameters. If the RBI announces a lowering of basis points for overall lending rates, it would certainly affect home loan interest rates favourably; however, this would apply to all amounts - not just the sub-Rs 20 lakh category\', says VR Shirodkar, senior manager, Bank of India.

The Reserve Bank or the government can only prod and induce banks to reduce rates through policy measures, but cannot force it on banks. In fact, there is no specific set of guidelines or regulations that banks have to follow while fixing home loan rates. The RBI only specifies that a bank's own board of directors must approve the maximum interest rate it charges.

'Banks, regardless of whether they are private sector or nationalized banks, are not at complete liberty to bring down home loan rates', said Sumeet Mehta, Assistant Vice President, Capital Markets & Investment Sales, Jones Lang LaSalle Meghraj, an international real estate consultancy. 'This is because they themselves are paying higher interest cost on deposits. Even with the best of intentions, banks have capital adequacy guidelines and risk weightages to consider, along with higher CRR provisions.'

Rising interest rates will help genuine home buyers

Though it seems ironical, higher home loan interest rates may indirectly benefit home buyers by forcing developers to bring down property prices. The RBI measure of keeping higher provisioning requirement for banks for home loans of above Rs 20 lakhs may do exactly that. It will keep investors -- one of the key players behind pushing up property prices - away from property market.

The RBI decision to direct higher provisioning for home loans above Rs 20 lakh was intended to discourage second home buying for investment, says Shirodkar of Bank of India.

'Increase in property prices in Indian cities like Mumbai, Pune, Bangalore and Delhi is attributable to increased investor interest, enabled by easy housing finance', says Mehta of Jones Lang LaSalle Meghraj. 'Investors take home loans to buy property in upcoming areas and then hold on to them for a while. Once property prices have appreciated, they sell them for a profit. On the other hand, the genuine user buys a home for living in it, regardless of how much its value appreciates.'

'In a buoyant market, property prices rise faster than the cost of funds. Today, when capital appreciation in certain locations can only be a bit more than interest cost, an investor no longer sees any advantage in investing in property via home loans,' said Mehta.

This has already started happening in Mumbai and other cities. 'Property rates in South Mumbai have stabilized, and have gone down significantly in areas like Vashi, Panvel and Kharghar. Builders in these localities are offering discounts of up to 16% on their previously-quoted prices of their properties,' said sources in property broking circles who did not wish to be identified.