There is good news for prospective home buyers. Home loan rates are expected to come down for new borrowers in the near term. This is because the Reserve Bank of India (RBI) has recently allowed banks to raise long-term funds through bonds for lending to affordable housing and infrastructure sectors.
The funds collected by banks through these bonds will be exempted from cash reserve and liquidity requirements. The new norms have been announced by the RBI following announcements made in the Budget by Finance Minister Arun Jaitley. This move will help to address their asset-liability mismatches.
Banks with a higher share of long-term infrastructure loans and mortgage loans stand to benefit the most as the new norms would allow them to lower interest rates for such loans without compromising on spreads.
Amit Bhatia, director and head, assets and business banking, Deutsche Bank India, says, "In the shorter term, interest rates for existing borrowers are unlikely to change. New borrowers, though, may benefit from lower rates since banks would compete among themselves to attract this segment."
Affordable housing covers housing loans up to Rs 50 lakh (for houses priced up to Rs 65 lakh) located in six metropolitan centres-Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad-and Rs 40 lakh (for houses priced up to Rs 50 lakh) in other centres.
The definition is periodically revised by the RBI. The RBI has stated that infrastructure and affordable housing need relatively long-term financing compared to standard bank loans. "If banks finance such long-term loans with short-term deposits, they create a risky asset-liability mismatch.
Banks would be better off if they could issue long-term bonds to finance such loans, but regulatory pre-emptions may make such issuance costly," it said.
Real estate developers, who have in the past found it difficult to raise capital, will now be able to source cheaper funds for development of affordable housing. "Long-term infrastructure projects, which banks have been reluctant to fund so far, will now get a new lease of life. Banks will now be able to lend to such projects easily without worrying about asset-liability mismatches and ensure long-term viability of these projects by drawing up a more realistic loan repayment schedule spread over a relatively longer term," says Bhatia.
In his budget speech, the finance minister mentioned about providing thrust to low-cost housing. He has allocated Rs 4,000 crore for low-cost housing schemes with an indication there will be relaxation in foreign direct investment norms for the affordable housing sector.
There has also been an increase in interest exemption of Rs 50,000 for a home loan for a self-occupied house property. The government has also shown its focus and concern for urban development by addressing the areas of urban renewal and smart cities. Rohit Gera, managing director, Gera Development, says, "Increased tax exemption limit will lead to big savings for income tax payers, encouraging additional investments in the housing sector.
By proposing schemes for development of airports in Tier II and Tier III cities, the finance minister is giving impetus to infrastructure development. This will boost the realty sector as good infrastructure and better connectivity will provide stimulus for people to migrate to these cities."