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Banks are reportedly considering a proposal to keep the interest on sub-Rs 20 lakh home loans between 7% and 9%. Price decisions like this will upset purists. But let’s consider some facts. As many as 80% of all housing loans in the country fall in this category and these loans have less risk weight than those above Rs 20 lakh. Do bankers have an incentive to offer smaller home loans at lower rates? Deposit rates had climbed as banks sought to buy the insurance of funds-at-disposal. But now that maintaining liquidity is a firm promise, reverse repo has been cut and more cuts are promised, deposit rates have started declining. On Monday, HDFC Bank cut deposit rates on some of its flagship products, with the reduction being steep for short maturities. The rates for deposits with a maturity of six months and 15 days have been reduced from 10.5% to 8.25%. For nine months and 15 days, the rates are from 10.5% to 9%, while for one year and 15 days, they are now 10% from 10.5% earlier. The bank has also slashed the rates for two years and 15 days from 10.5% to 9.5%. Lending for low-cost housing is a volume business and banks can seriously look at this option now. The latent demand for housing is still strong. But lowering of interest rates alone will not work. Buyers are unwilling to buy at the current price levels, as is evident from the decelerating loan growth in the housing sector. In the second quarter of the current fiscal, it is down to Rs 32,792 crore, compared with Rs 34,333 crore in the same period last year. Property prices need correction. Remember, property prices went up by almost 80% in many parts of the country in the last couple of years. And, builders are sitting on stocks without any buyers. Clearly, these are conditions calling for price reduction.
Low-cost housing offers real opportunities to real estate companies in India. Anecdotal evidence suggests the housing market for the Rs 7 lakh-to-Rs 15 lakh segment translates into a market size of over Rs 50,000 crore annually. This is nothing to scoff at. Besides, there are strong multiplier benefits. The housing sector hires a relatively high percentage of low-skilled daily wage workers as compared to infrastructure and manufacturing projects. And, for every direct job created in the housing industry, eight jobs are created indirectly With a housing shortage of 24.71 million—a Planning Commission estimate—and over 90% of this in what the government calls economically weaker sections, the social dimensions of a big push in low-cost housing are obvious. As for problems of risk-taking on repayment capacity of borrowers, Indian banks are relatively prudent and will be even more so after the crisis.
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