Finally, there’s some good news for those who have taken home loans of up to Rs 20 lakh. Interest rates are expected to fall by up to 0.5 percentage points following the Reserve Bank of India’s decision on Tuesday to reduce the capital requirements for banks to give housing loans.

Better still, this may just be the start of a period of soft interest rates, at least for those who are willing to fork out a little extra by way of an upfront payment or settle for a not-so-swanky apartment.
The RBI’s move in its lean season credit policy is likely to benefit old borrowers more as most home loans taken until a few years ago were for amounts ranging between Rs 15 lakh and Rs 20 lakh, bankers said.

The impact on new borrowers is, however, expected to be limited, at least in big cities where real estate prices have risen manifold in recent times. The move could have a visible impact in cities like Nagpur, Jaipur, Visakhapatnam, Patna, Lucknow and Ludhiana, where apartments costing about Rs 20 lakh are not as scarce. Besides, it also helps the government’s ‘aam admi’ plank since low-cost housing is expected to get a fillip.

Just last week, bank chiefs had urged finance minister P Chidambaram to push their case for an easing of the home loan and interest rate environment.
On Tuesday, RBI governor Y Venugopal Reddy cut the risk weight on home loans up to Rs 20 lakh from 75% to 50%. This means that the central bank feels home loans are less risky and has signalled that banks can be a little more aggressive in lending to the sector.
The change in provisioning norms is not going to help borrowers alone. Banks which are facing higher default prospects also stand to gain. The rise in interest rates from about 6.5% in 2004 to about 12% at present has pushed up equated monthly instalments (EMIs) by nearly 50%, raising the chances of default.
The credit policy also signals a pause of sorts since the RBI has refrained from raising any of its key lending rates—a frequent occurrence for the last two years. How long Reddy will keep his finger on the pause button will depend on economic growth parameters and inflation.

Bankers pointed out that the tone of the policy was still dominated by the objective to maintain price stability but continue the growth momentum. At the same time, the monetary policy emphasises the need for caution on credit quality and orderly conditions in the financial market. Bankers said that because of the floating rate mechanism, a rise in interest rates beyond a point might lead to enhanced default and adversely affect banks and financial markets.
Reddy acknowledged that those borrowers who had opted for floating interest rates did not appreciate the risk involved.
Indians can remit $100K overseas
The RBI has liberalised the remittance and forex schemes to move towards full capital account convertibility. Indians can now invest up to $100,000 overseas, up from the earlier limit of $50,000, and buy shares on foreign stock exchanges, property or commodities besides paying for their children’s education. The credit policy has also increased the investment limit for Indian companies in JVs and wholly-owned subsidiaries abroad to 300% of their net worth.
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  • Home loan growth to shrink to 20%

    Growth in home loan disbursals is likely to slowdown to 20% in 2007-08 compared with the 30% increase logged in the last three years because of rising property prices and interest rates, a study by the credit rating agency Crisil says.
    Property prices in the metros and cities have grown at an annual rate of 30-40%, and interest rates have increased by a total of about 400 basis points since October 2004, resulting in the weakening of affordability. However Crisil argues that demand for mortgages will continue to grow.

    "20% on a back of a 30-35% growth is still strong and we are not expecting a crash in real estate because the growth in housing is demand-driven. Majority of the demand is need-based, driven by nuclear families, double income, young population and fiscal incentives. High prices also have a lot to do with supply side constraints, especially in cities like Mumbai," said Tarun Bhatia, head, corporate and government ratings Crisil.
    However, not all agree with the Crisil view. US property tycoon Samuel Zell has said that the property boom in India was ‘on the brink of excess’ and would end in tears. Zell said it was ‘mental masturbation’ to believe there were endless riches for investors in India’s real estate market.

    Crisil said the lowering of risk weights by the Reserve Bank of India on housing loans up to Rs 20 lakh would only push the growth slightly above the expected 20%. "It would not lead to a surge in demand for loans because the facility is valid only for a year and the RBI could review it if lending in the segment became aggressive."
    Analysts also pointed out that increased competition among banks and rising rates is putting pressure on the profitability of housing finance companies. “Incremental net profitability margins of housing finance companies fell to 1.52% in the first half of 2006-07, from 1.76% in 2004-05. Many companies are borrowing short-term to counter this trend, a risky strategy in a rising interest rate scenario.”
    Housing companies will also continue to lose market share to banks, the report says. From 23% of the incremental market share right now the market share of such companies will come down to 20% at the end of the financial year. “Banks have an advantage because of their resource profile. They can garner deposits and also have current and savings account. While companies depend on wholesale borrowings,” Bhatia said.

    “In the future, smaller companies like Dewan Housing will focus in niche markets like Tier II and III cities where banking does not have a presence. They may also try to raise loans pools, securitise and sell them to create capital for future disbursals,” Bhatia said.
    However, ratings on housing finance companies remain stable, Crisil said. Large companies like LIC Housing and HDFC are on a better ground, cornering 70% market share among housing companies.
    “Companies continue to enjoy strong parent support and capitalisation. This will enable them to maintain their ratings at current levels over the medium term. On its short-term ratings, Crisil continues to watch the management of asset-liability mismatches very closely,” said Raman Uberoi, senior director, Crisil Ratings.
    The low spread on EMIs was also not applicable to HDFC because “it can pass on rate hikes to customers and it has access to overseas funds and its resources, profitability are good,” Bhatia said.
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  • Cheap home loans may just be a dream

    Customers looking for a reprieve in their home loan EMIs may have to wait longer,or worse still, expect a further hike in interest rates. Despite a cut in risk weights on home loans up toRs 20 lakh, banks are in no mood to lower the rates.

    They are looking at differential pricing of loans based on their amount and tenure. Public sector banks, which had so far refrained from raising rates following a government diktat to hold rates on home loans, are now planning to go for a rate hike. Even private banks may take some time to pick up the cue.

    With cost of funds increasing,lending rates have only one way to go— upwards. With banks belting out super-saver deposit schemes yielding 9-9.5% returns, the rates on advances need to go up too. In the previous two instances when RBI had increased the benchmark rates, most state-owned banks did not go for a rate hike. On the other hand, each time RBI hiked rates, private sector banks followed suit.

    For public sector banks, interest rates on loans up to Rs 20 lakh are in the range of 9-10%, compared to 13-14%for private banks. "The decision on home loan rates will be determined by a number of factors, including cost of funds," sources at ICICI Bank said. "The bank will decide on home loan rates soon. While new borrowers may be spared, the impact of a rate hike on existing borrowers will have to be studied,"executive director of a public sector bank said. "Rates will now be determined on both the amount and duration of the loan. With a risk weight classification of above and below Rs 20 lakh, banks will now price loans differently. Loans above Rs 20 lakh will cost more than those below Rs 20 lakh, at the same time being dictated by the tenure of the loan," said Punjab National Bank chief general manager U S Bhargava.
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