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Real Trouble

FM advises banks to go slow on realty loans but experts say that this will not impact home loan though interest rates may step up, inflowing FDI is expected to help the situation

Joydeep Ghosh

14 Aug 2007

As if consecutive rate hikes by the RBI and lenders were not enough, finance minister (FM) P Chidambaram has also stepped in to 'advise' banks to go slow on real estate loans.

The story is getting gloomier for the real estate sector. For almost two years, the Reserve Bank of India (RBI) has been indicating that the real estate sector is 'overheated'. The apex bank has also increased the reverse repo rates and more recently, the CRR (cash reserve ratio) by 0.5 per cent (50 basis points).

And if that was not enough, the FM recently asked banks to go slow on realty loans and 'lend more' to finance the country's gross domestic growth. Says Niranjan Hiranandani, Managing Director, Hiranandani Constructions, 'The step is definitely retrograde in nature and will lead to more inflation.' He feels the lower middle class will get adversely impacted because of this decision. Today, 80 per cent of home loans are less than Rs 5 lakhs and rate hikes impact them the most.

Adds Abhishek Lodha, Director, Lodha Group, 'The FM's advice is mainly a risk-mitigation measure; so, we could expect another small rise in the home loan rates.' He also feels that banks would be a little more careful in giving loans to grade B and C builders.

Pankaj Kapoor, director of real estate consultants Liases Foras feels that interest rates have increased dramatically in the last year-and-a-half. This, for him, is a big issue as purchasing power of consumers has gone down.  

Experts feel that the FM\'s advice arises from the fact that today, builders have access to easy cash from banks and that has led to the rise in property rates in the last couple of years. As a result, the end user is finding costs rising by the day. 'The idea of the FM would be to reduce the cash influx into the sector so as to correct the land prices', says Kapoor.   

However, Hiranandani feels that when we are still short (by almost 20 million) houses in this country, the government needs to decide whether housing is a priority or not. 'While the government is encouraging more production in sectors like aviation and telecom, how can we look at less production in the housing sector?', he asks.  

So, does it mean that the sector will be stifled for cash? -- Experts feel that such a situation should not arise because there is money that is coming in through Foreign Direct Investment (FDI) and a lot of builders are also approaching the stock market in the coming months. As Lodha puts it, 'We, as builders will, also factor in these measures in our own growth plans.'   

Hiranandani feels that the housing sector may not suffer a lot because the demand for housing is too high. 'There is still dearth of good housing in India,' he adds.

The crux is that we are looking at debt becoming more expensive for builders and home loan borrowers. And while builders have to tap other resources like FDI and equity, consumers will have to smile and bear the brunt of these additional costs.