While most banks are in a wait-and-watch mode on their lending and deposit rates after the Reserve Bank of India's decision to hike key policy rates--repo and reverse repo--by a modest 25 basis points (100 basis points=1%), it is certain that from now on, anyone applying for a housing loan from a bank will have to pay a margin money of at least 20% of the value of the property. Earlier, this margin money varied between 10% and 15 %.
The RBI also increased the risk weightage of loans above Rs 75 lakh taken for buying property, which could increase the interest rates on loans for high-cost properties. This is being seen as a pre-emptive measure to rein in the possibility of the creation of an asset bubble and a sign that there could be overheating in the property market.
The RBI, with a focus on taming the currently rigid high inflation rate in the economy, raised repo rate (the rate at which banks borrow from the RBI) to 6.25% and reverse repo rates (the rate of interest that banks get when they park their surplus money with the central bank) to 5.25%. These steps were expected by most market players ahead of the policy. The central bank also said that unless anything drastic happens to the economy, it would probably pause in hiking rates for the time being. Simultaneously, IDBI Bank , announced raising deposit rates by 10-50 basis points and lending rates, including home loan rates for loans of Rs 75 lakh and above, by 25 basis points.
RBI said that loan-to-value (LTV) ratio for housing loans should not exceed 80% and increased the risk weight for residential housing loans of Rs 75 lakh and above, irrespective of the LTV, to 125%, from 100% now. It also increased the standard asset provisioning by commercial banks for all housing loans with `teaser rates to 2%.
The raising of LTV ratio to 80% means that any new home buyer going for a housing loan, will have to bring in at least 20% of the value of the property while the balance, 80% or less, could be financed from a bank or a HFC.
Going by tradition, even other housing finance companies (HFCs) not under RBI will perhaps adhere to the same rule of margin money of 20% of the property value. This is because in the past whenever the central bank imposed some new rules related to housing loans by banks, National Housing Bank (NHB), the regulatory body for HFCs, had imposed the same conditions on these companies.
Industry players pointed out that the RBI's steps were more directional since the average LTV in the housing finance industry is at about 67% while average loan size would be between Rs 20 lakh and Rs 25 lakh. On the teaser loan rate, industry players pointed out that such schemes which are still being offered is expected to end by March 2011.
The RBI measure could also work in favour of home buyers in the form of a either a slow or nil rise in real estate prices. This concern will ensure that there is a short-term cap on real estate prices and in the near future it may come down marginally.
As for lending rates, any decision to hike them going forward will depend upon the availability of funds in the banking system, also called liquidity, bankers and economists said.
Although it was clear from the tone of the policy document that reining in inflation and managing people's expectations about the rate of inflation were the RBI's major concerns, it could not completely put the growth factor in the background.
Seen from another side, the decision to hike key policy rates could also lead to some tough times for the RBI itself, market players pointed out. Lured by higher interest rates in the country compared to most developed markets, there could be a rush of foreign funds into the Indian debt market, just like the rush of FII money that the stock market is witnessing at present. The fact that the RBI is also keeping a strict vigil on capital flows through the debt market route was proved when the central bank's governor, D Subbarao, dwelt on this topic in substantial detail in his post-policy media conference.
It could be pointed out here that in recent times while several of the top RBI officials have spoken about controlling capital flows, both through the equity and the debt routes, the finance ministry has mostly been against any form of capital control.
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