Property prices are touching an all-time high. The Reserve Bank of India (RBI) had earlier this week asked banks to set aside more capital for lending to property developers - which means that loans to builders will be priced higher. Put simply, this may make new homes more expensive as developers who face the prospect of being charged a higher interest rate on their loans may well pass on the burden to home buyers.
The Reserve Bank has forced banks to provide more capital while lending to the real estate sector, in an effort to discourage excess flows. Now the Reserve Bank has raised the standard provision for loans to property developers from 1% to 2%. This will mean that for each loan of Rs 100 crore that a bank disburses to a property developer, Rs 2 crore needs to be set aside from its profits as a provision.
To offset this impact of setting aside more capital in their books for such a lending, banks will charge higher interest rates on loans to property developers, who, in turn, may pass on the higher rates to customers.