July 16th 2014.
In a big boost to real estate developers and property buyers, the Reserve Bank on Tuesday said long-term bonds raised by banks for infrastructure and affordable housing lending will be exempted from mandatory reserve requirements. The RBI’s move comes within days of Finance Minister Arun Jaitley’s Budget proposal last week.
In simple terms, the RBI has done away with some of the stringent norms to incentivize banks to lend for affordable housing and infrastructure development.
Former State Bank of India chairman Pratip Chaudhuri told NDTV that interest rates on home loans might fall by 40-50 basis points (0.5 per cent).
A back-of-the-envelope calculation shows that a 50 basis point drop in interest rate on a Rs. 50 lakh loan for 20 years will bring down EMIs by over Rs. 1,700 per month.
However, only new home loans will qualify for cheaper interest rates, Mr Chaudhuri said.
The Reserve Bank has also changed the definition of affordable housing to factor in rising property prices and inflation. In the six metros, housing loans up to Rs. 50 lakh (for property valued up to Rs.65 lakh), while in other cities, housing loans up to Rs. 40 lakh for property valued at Rs. 50 lakh will qualify as affordable housing, the central bank said.
The new government’s focus on housing sector has given a fresh lease of life to the real estate sector, which has been struggling under high interest rates and economic slowdown.
“Currently, borrowing rate for developers is 13 per cent. With this development, cost of debt may reduce by at least 150 basis point,” brokerage Maybank says.
In his first Budget presented on Thursday, the Finance Minister had announced a proposal to raise the tax-free cap on home loan interest for self-occupied property from Rs. 1.50 lakh to Rs. 2 lakh.
In other proposals related to the housing sector, Mr Jaitley eased foreign direct investment (FDI) norms in the housing sector, which will help in bringing the much-needed capital to the sector. Mr Jaitley had also paved the way for the stock market listing of real estate investment trusts (REITs) in a move to boost foreign investment in the property sector.