Home Loan Interest Cuts May Revive Real Estate in India

By: George Gonigal

'Feel Good' for Customers, Developers and Banks, this Diwali...

Good times waiting for indian Real Estate. Hard-pressed with the falling demand, and slackening growth numbers, Indian banks have finally slashed interest rates on home loans. Interestingly, the banks have appropriately chosen the period of Diwali to cut the interest rates and treating their move as a festive offer.

The bankers, on the positive note, are keeping their fingers crossed and expect that the initiative would encourage people to arrive at a decision of buying a house. On the other hand, real estate developers also feel that the cut would probably revive the ailing residential property markets, and after Diwali, the picture would be far clearer as to how markets would behave further.

In actuality, it is in the interest of banks only to reduce rates, as the growth rate in home loan lending segment has been on downslide over the past 3-year.

Earlier to fiscal year 2005-06, Indian banks were posting year-on-year (YoY) growth rates of 49.5%, 73.9% and 48.6% respectively, however the same fell down to 29.1% in 2005-06, and 26.6% in 2006-07. In absence of rate-cut, this number was estimated to further go down to 15-17% in the current fiscal. And in this case, the decision to curtail interest rates was inevitable, bank officials admit.

Meanwhile, whatever may be the implications of the ploy on the banking sector; it is finally the Indian real estate industry and consumers who would be benefited of the same.

Home loan interest rate is the biggest and the most critical factor that drives Indian real estate, and the hike in interest rates, of about 5-per cent in the past couple of years, has hammered down the industry, a senior official of a construction group pointed out.

Further, as per the recent report by Assocham 'Impact of Rising Home Loan Rates', demand for the residential fell down by an average 20 per cent in the past 12-months, owing to the sharp rise in interest rates. Therefore, softening of interest rates would bring back life in the industry.

Till this moment, India's biggest public sector bank SBI had dropped its interest rate on home loan by 0.75 per cent to 10.50 per cent. Private sector major HDFC also has also reduced the rate from 11 per cent to 10.50 per cent. ICICI, Bank of Baroda, etc. have also followed the suit by reducing their lending rates between 0.50 and 1.00 per cent.

Earlier, the rates had risen from the range of 6-7 per cent of 2000-2002, to as much as 11-14 per cent in 2005-2007. Such a steep rise definitely put a deep impact on the pockets of the people intending to buy residential properties by taking home loan, and the bearing was quite visible on the demand for housing property, across the country.

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