SECTOR TO GAIN FROM REDUCED BANKING RATES

In a move that will provide a huge help in driving the demand for real estate sector in our country, a handful of banks have slashed their lending rates and a few have made a cut in their deposit rates which is considered a sign for future reduction in lending rates. A drop in lending rates means that the Equated Monthly Instalments (EMIs) are decreased which provides an immediate relief to the pockets of the customers. Country’s second largest private sector bank in terms of assets, HDFC Bank yesterday announced a reduction of 35 basis points or 0.35 percent on its base rate bringing it down to 9.35 percent which will be effective from today, from a previous 9.7 percent; currently getting it to the lowest in the industry standing shoulder-to-shoulder with SBI and ICICI Bank. Also, the Bengaluru-headquartered state owned Canara Bank reduced its lending rate by 10 basis points or 0.10 percent bringing it down to 9.90 percent from 10 percent previously. Axis Bank will reduce its deposit rates by 0.2-0.5 percent across various maturities with effect from today signalling a future drop in lending rates.

“The reduction in lending rates by banks is coming at the right time as we are inching closer towards the final festive season of the year where most home sales takes place. It was also important on the banks behalf that these rates were reduced as frequent nods had already come from the RBI chief and by end of this month, another RBI review policy is awaited that might see a rate cut only when the banking industry cooperates with the RBI”, states Mr. Deepak Kapoor, President-CREDAI Western U.P. & Director, GulshanHomz. Also agrees Mr. Ashok Gupta, who is the CMD of Ajnara India Ltd. as he believes that “There exists a direct relation between reduction in lending rates by banks and an increase in demand for property. It is then just a matter of proper timing by the banks while adjusting the rates. Just a month away from now we will begin with the festive season of the Hindu calendar where massive demand is observed every year, and this is the time when potential customers plan and allocate their funds for the big purchase. Thus, a fall in lending rates today will promote the sentiments in the market and allow people to strategize their upcoming purchase”.

The Reserve Bank Of India had already provided the country with three rate cuts this year by 25 basis points or 0.25 percent on each occasion. In its monetary policy review on August 4^th, RBI governor Mr. RaghuramRajan had deplored that banks had lowered their rates by only 30 basis points since the first rate cut in January this year despite RBI having cut its benchmark rate by as much as 75 basis points since then. Mr. Rajan had also linked better monetary policy show or banks cutting their lending rates to any future rate reduction by the central bank. “The RBI has played its part seemingly well with already reducing the repo rate by 75 basis points within this year with two more policy reviews left for this calendar year. The ball is now in the banks court to pass on the benefits to the public otherwise RBI won’t be too lenient in the upcoming policy reviews. This rate cut by banks is a welcome move as it will further assist in boosting the demand for homes in the sectorwhich has become the need of hour considering rising inventory levels nationwide”, explains Mr. KushagrAnsal, Director, Ansal Housing. Adding to the view, Mr. Sudeep Agarwal, MD, Shri Group avers “These surprise rate cuts by a few banks will put pressure on other lenders to bring down their rates which will be largely favourable for the potential customers as they will have much reduced EMIs to pay for their homes and at the other side, the future demand for property market will see a correction as the overall cost of a unit on the customer will reduce drastically. This also holds a big significance as further the banks reduce their rates, more pressure will mount on RBI for its next review policy”.

Banks with high liquidity can easily afford to decrease their lending rates without touching the deposit rates but banks with lesser liquidity are first forced to decrease the deposit rate which on the other hand increases their liquidity then can they bear the drop in the lending rates. A drop in the deposit rate directly leads to lesser returns on investments such as fixed deposits, etc. Thus, major players of the banking industry are able to satisfy the complete demand whereas other banks can either provide higher returns on investments or charge less on the amount lent to the public. “Looking at the present economic scenario in the country, the banks will have to create a perfect blend between providing higher returns on investments or charging less on loans as on either side sentiments play a vital role in attracting customers. Another way around can be, when RBI allows the banks to lend below the base rate particularly for home loans, so that the demand for credit and property can be ignited the benefit of which will go in the accounts of real estate sector and the banking industry”, enlightens Mr. Rupesh Gupta, Director, JM Housing.

As more and more banks join the race of reducing the lending rates, it will be an all-win situation for the public, and real estate sector will be the biggest gainer of them all. The prices in this sector are witnessing its record fall for over a few years along with unprecedented inventory levels that will now gradually benefit from this reduction in lending rates made by banks. “Blaming on poor purchasing power, today’s population in India is making all the big purchases on credit, thus making the role of Banks even more quintessential in how the economic cycle circulates. As the lending rates are directly proportional to the EMIs, lower Interest rates are the need of the hour. With the slash in lending rates by one of the biggest banks in India –HDFC and Canara- the borrowers are at the happy spot. Especially with festive season just around the corner, it was a wise step to shake the dormant sales in the real estate sector”, concludes Mr. Rajesh Goyal, Vice President-CREDAI Western U.P. & MD, RG Group.

Real estate developers must lower prices: Rajan

MUMBAI: Reserve Bank of India governor Raghuram Rajan on Thursday said that real estate prices need to come down in order to ease lending norms for home loans. The governor's comments come at a time when unsold housing stocks are at a two-year-high and developers continue to hold on to prices despite a sharp fall in transactions.

With credit growth at a two-decade low, SBI chairman Arundhati Bhattacharya on Thursday proposed that the RBI allow banks to provide home loans below the Base Rate. Such home loan schemes were available five years ago and were then described as "teaser" loans by the regulator. She was speaking at the 'Banking and Economics Conclave' organized by the bank. Rajan, however, said that builders should first bring down prices and clear the stock else easier home loans might keep realty rates high.

"In 2008, when the economy started faltering, one of the things that helped demand was the 8% housing loan that SBI gave. At that point of time, it was tagged as a teaser loan but we at SBI refuted that because there was no change in due diligence or eligibility. The only thing was that rates for first few years were lower," said Bhattacharya. According to the SBI chief, there was two years or unsold real estate stock and home loans are one of the safest assets in the books of banks with minimal defaults.

Rajan, who won worldwide fame for his forecasts on the sub-prime crisis, however, struck a cautionary note. "I think we need the market to clear. With growing unsold stock, we need to see the ways to do it. Some of it might be by making loans easier, but we also don't want to create a situation where prices stay high at the level, which means demand can't pick up," Rajan said at the conclave.

Although sub-Base Rate loans may sound good for borrowers, they largely help new borrowers. For existing borrowers to benefit from reduction in costs, the Base Rate will have to see a reduction.

During the first quarter of the fiscal, bank credit has grown by 1.2% compared with 1.7% in the previous year. According to Madan Sabnavis, chief economist, Care, the retail segment continued to be dominant with a growth of 4% as against 2.7% last year. Within this, home loans and vehicles were the leading sectors with growth of 3.9%. Growth in credit to the manufacturing sector has been negative at 1% as against -0.3% last year.

Source: Times of India