Home loans getting costlier

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RBI clips real estate wings; home buyers wary
RBI Governor Y.V. Reddy believes it is high time the 'overheated' real estate sector was doused with a coolant. The hike in the repo rate (rate at which banks borrow from RBI) by 25 basis points, to curb inflation, increases bank lending rates. And, the increase in the provisioning requirement of standard assets, from 1 per cent to 2 per cent, requires banks to set aside more capital in their books for such lending.

His double whammy has ramifications on two fronts. It could bring real estate developers down to earth and rein in the great Indian middle class' rush to own dream homes. In plain terms, banks will charge higher interest rates on loans to property developers, who in turn, will pass it on to consumers.
Strong economic growth, rising income levels, and improving transparency boosted the real estate sector in 2006. The industry has been growing at 30 per cent annually, and offers maximum returns to investors. The Associated Chambers of Commerce and Industry of India forecasts a growth to $90 billion by 2015.
Spiralling property prices and growing exposure of banks to the realty segment have allowed a huge flow of what RBI brands as ?'speculative money' into the sector. Credit has been rising by 84 per cent on a year-on-year basis, accounting for 2.5 per cent of non-food credit. RBI figures show banks' exposure to real estate was Rs 37,838 crore (October 2006).
The provisioning requirement directive to banks means that for every Rs 100-crore loan exposure to segments like realty or personal loans, they must deduct Rs 2 crore (up from Rs 1 crore) from the profit and loss account. The 2 per cent provision would mean banks having to set aside Rs 756.76 crore.
With the public alarmed at the possibility of further hikes in home loan rates, too, the finance minister cautioned the public sector banks to hold home loan interest at current rates. But private banks like ICICI have announced an increase of 1 per cent in home loans, with effect from February 9. Home loans have steadily risen over a two-year period, up from 7 per cent in 2004 to around 10 per cent today. The equated monthly instalments (EMIs) on a home loan for 20 years have grown by over 25 per cent in the same period.
Several banks are already going slow on sanctioning funds to the realty segment. "By raising the provision requirement to these segments, RBI is signalling that we should slow down loans to them, but focus on the productive sector where the provisions remain unchanged," said K.C. Chakrabarty, chairman and managing director of Indian Bank.

The FICCI, however, feels that at this juncture of economic growth it is critical for the industry to have access to bank funds at globally competitive rates. Increasing lending rates would adversely impact the small and ?medium enterprises, which do not have other ways to fund their expansion plans.
Sanjeev Srivastav, director, Assotech, a real estate major, said, "RBI is tightening the sector because of apprehensions over the so-called boom in real estate. Many projects in the pipeline would suffer. The sector has responsibility like housing for the low-income groups and economically weaker sections. It will be difficult for us to cut down on funds and provide affordable habitats."
Dibyendu Choudhury of Confederation of Real Estate Developers' Association of India is not pleased. "Real estate comes after IT in terms of contribution to the GDP. RBI could have asked industry bodies like the FICCI or ours to work out something," he said.
On the flip side, RBI's action could help curb liquidity and thereby reduce the pressure on inflation. Banks would lend selectively at a slightly increased cost. It would still pinch the wary middle class.

- Mumbaikar