Search News

BUYING a new home may turn out to be more expensive. This is not because of any hike in home loan rates. It is just the fact that builders, who face the prospect of being charged a higher interest rate on their loans, may well pass on the burden to home buyers. With the Reserve Bank of India (RBI) forcing banks to set aside more capital for lending to property developers, loans to such developers and builders will be priced higher. Loans also may be hard to come by for some of these builders, with several banks already going slow on sanctioning funds to the realty segment. While RBI’s move is aimed at discouraging banks to lend less to the real estate in the backdrop of inflationary concerns, in practice, the higher borrowing costs for the developer is bound to translate into higher rates for home buyers, said bankers. India’s realty sector has attracted a huge amount of interest from both local and global investors fuelling a rise in property prices in even Tier II towns. Monetary policy authorities have consistently voiced their concern over spiralling property prices and the growing exposure of banks to the realty segment. Since 2005, RBI had forced banks to provide more capital while lending to the real estate sector, in an effort to discourage excess flows.

On Wednesday, RBI 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 own 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.

“By raising the provisions requirement to these segments, RBI is signalling that banks should slow down in giving loans to them, but focus on productive sector where the provisions remain unchanged,” KC Chakrabarty, chairman and managing director of Indian Bank said.

“Real estate developers are already feeling the pinch of the policy after RBI hiked the risk weightage to 150 basis points. Most banks have already slowed down on giving loans to them,” said TS Bhattacharya, managing director of State Bank of India. Although RBI has not raised the risk weightage or standard provisioning for home loans, bankers feel that if their cost of funds rises in the near term, they may be forced to hike the overall lending rates, including home loan rates. Banks now charge about 9.25-10% for loans based on floating rates and close to 11% for home loans disbursed on a fixed rate terms.
The recent efforts by RBI to rein in credit to the realty segment do not seem to have quite worked. The RBI data shows that loans to commercial real estate continues to grow.

Find Lawyer / Law Firm

Extradition Law in India

Every time an offender stealthily leaves India to take refuge in another country, the Government of India starts all over again with its strategy of bringing him back to the nation to make him stan More

Legal Consultation - Consult over phone, chat or send questions

Helplinelaw can set up your session with quality and experienced lawyers to discuss and resolve your legal matters. You can avail consultation in form of sending questions, phone call or webchat discussion  More