AS THE PANDEMIC CONTINUES TO IMPALE THE INDIAN ECONOMY, RBIS UNCHANGED RATES MEAN THAT HOME LOANS WON’T GET EXPENSIVE BUT, IT LEAVES REALTY DEVELOPERS HIGH AND DRY AS CONSTRUCTION COSTS MOUNT WITH NO RESPITE FROM GST OR OTHER TAXES.
By: Sapna Srivastava
For the sixth consecutive time, the Reserve Bank of India decided to leave the repo rate unchanged as was expected by policy analysts. As a result, the repo rate, at which the RBI lends money to banks, remains at 4 per cent while the reverse repo rate, at which it will borrow money from banks will stand at 3.35 per cent. Good news is, this also means that home loans won’t get expensive.
In addition, the central bank will open a Rs 15,000 crore on-tap liquidity at repo rate for contact intensive sectors till March 2022. This he said will give lending to the hospitality, car and bus rental operators, restaurants, salons, and other high-contact services. Another major move has been with regards to yield management as the RBI stressed on smooth liquidity management and orderly G-sec borrowings, with a more vocal and defined GSAP .
WHAT ECONOMISTS HAVE TO SAY
Deepthi Mathew, Economist at Geojit Financial Services, said: “To support and revive the economy, RBI would continue with the accommodative stance as long as it is needed. The governor cautioned about the factors that could put upward pressure on inflation.”
George Alexander Muthoot, Managing Director at Muthoot Finance stated, “RBI left the policy rates unchanged for sixth straight time. This commitment by the central bank was supported by additional measures such as a separate liquidity window of Rs. 15,000 crore for certain contact intensive sectors and enhancing exposure threshold to Rs. 50 crore from Rs. 25 crore for MSMEs, small businesses and individuals for business loan purposes under Resolution Framework 2.0. Such steps will help borrowers to better mitigate the impact of pandemic’s second wave.”
“THE RESILIENCE OF THE AGRICULTURE SECTOR, FORECAST OF MONSOON, AND THE GATHERING MOMENTUM OF THE GLOBAL ECONOMY COULD ACT AS TAILWINDS FOR THE DOMESTIC ECONOMY AS THE SECOND WAVE RECEDES. RBI’S FOREIGN EXCHANGE RESERVE ALMOST TOUCHING THE $600 BILLION MARK ALSO GIVES THE CONFIDENCE TO DEAL WITH CHALLENGES ARISING OUT OF GLOBAL SPILL OVERS,” RBI GOVERNOR, SHAKTIKANTA DAS.
77% in servicing of existing loans, 85 per cent developers are facing disruptions in the planned collection, and 69 per cent are facing issues in the disbursement of customer home loans. One-time restructuring of loans is one of the most urgent demands of the realty sector
Madhavi Arora, Lead Economist at Emkay Global Financial Services views were, “The MPC expectedly stayed on hold and emphasised its commitment to keeping policy accommodative and maintaining ample liquidity as long as necessary. This more state-led guidance hinges on growth revival becoming durable. Overall, while we do not see any action on the policy rate front in the coming months, we are poised to see a more accountable and action oriented RBI ahead. We reckon even as yields may inch up gradually and orderly, the RBI will continue to strive fixing skewed yield and maintain its preference for curve flattening.
HOME LOAN BORROWERS BENEFITS
This seems to be the opportune time for homebuyers to consider home loan as the interest rates are low. The RBI stance reflects its response to the current pandemic challenges and is an advantage for home loan borrowers. The unchanged repo rate means, the floating retail loan rates will continue to be at the lowest level.
For existing home loan borrowers with home loans linked to an external benchmark, the EMIs will remain the same. They will decrease or increase depending on the bank reducing its margin or raising the risk premium. Also, in case of home loans linked to MCLR, if the bank reduces its MCLR now, the reduction will result in lower EMIs at the time of reset date of the home loan. Furthermore, the new lending rate regime offers better transmission of RBI policy rates in comparison with the base rate and BPLR rate-linked loans, as per financial experts. Therefore, if it is a floating rate home loan with higher interest rate under BPLR or base rate, it is better to shift the loan to an external benchmark linked loan to avail lower rates.
IMPACT ON REAL ESTATE RECOVERY
This was the first RBI Monetary Policy Committee (MPC) meeting after the government data showed that the economy contracted 7.3 per cent in the previous financial year (FY21). Although the RBI announcement was on expected lines, wanting more to combat the liquidity crisis and to boost housing demand, real estate fraternity was hoping for a rate cut in the wake of the second wave of pandemic crushing small businesses and halting construction activities.
Almost 95% homebuyers have postponed their decision to buy a house due to the COVID-19 related uncertainties. A staggering 98% real estate developers are facing reduced customer enquiries, 92% are experiencing labour shortage at construction sites and over 82% are facing project approval delays, a report by Credai National has revealed.
The real estate sector did not get anything substantial, but the realty firms are being optimistic about the resultant economic growth from the move. The announcement of G-SAP 2.0 and On Tap liquidity window for contact intensive sectors will ensure adequate liquidity in the system and financially enable segments such as hotels, tourism, salons, aviation ancillary services, etc., thereby also retaining the buyer sentiment.
Realty experts are of the view that low home loan interest rates have worked really well for the sector. What is expected is the quick disbursal of home loans to ensure that the sentiment of buyers remain high.
Anshuman Magazine, Chairman & CEO, India, South-East Asia, Middle East & Africa, CBRE on a positive note said, “RBI’s maintenance of an accommodative stance will help sustain homebuyer sentiments which were strengthening pre-second wave. With the repo rate and reverse repo rate being maintained at a status quo of 4% and 3.35% respectively, banks and NBFCs will continue to render loans at reduced rates to homebuyers, thus supporting demand in the realty sector. We also welcome RBI’s directed focus on infusing liquidity in the industry, specifically in sectors such as hospitality and tourism, which will further benefit the overall realty sector.”
Shishir Baijal, Chairman & Managing Director at Knight Frank India, said: “Although expected, the RBI has continued its growth supportive policy stance. Additional measures to enhance liquidity support to most vulnerable touch sensitive sectors and small businesses; and expanded credit exposure limit for resolution is a great move. As the nation attempts to recover from the second wave of pandemic, there is a dire need to provide monetary policy support – on account of both easy availability and lower cost of funds – to households and businesses alike. Besides the monetary policy intervention, as we come out of graded regional lockdowns and further resume economic activities, there is a greater need to provide adequate fiscal support to jump start consumption demand. Demand stimulant measure like credit subsidy or tax waivers even for a limited period can play a transformative role until we reach the pre COVID-19 normalcy thresholds.”
Anurag Mathur, CEO, Savills India added, “The Reserve Bank of India has maintained an accommodative stance leaving the repo and reverse repo rate unchanged despite the marginal rise in inflation in recent months. The real estate market, especially the affordable housing segment, will continue to benefit from the record low interest rates. In addition, the central bank’s decision to provide liquidity support of Rs 10,000 Cr to the National Housing Bank is a welcome move that will help improve lending in the affordable housing segment. Though the overall growth prospects remain encouraging with a GDP growth rate expectation of 10.5% in FY 22, the ongoing economic revival is subject to the magnitude of the second wave of infections and localised lockdowns.”
Samantak Das, Chief Economist, and Head Research & REIS, JLL, expects the competitive mortgage rates to provide long term support for sustained growth of real estate as the overall economic recovery leading to job, and income growth will be contributing factors for housing demand. “Banks and housing finance companies are expected to increase mortgage lending due to stable interest rates and comfortable liquidity environment. The demand for housing, which has shown initial signs of recovery in the latter part of 2020, is expected to sustain if favourable interest rates and price incentives by real estate developers are further supported by economic recovery and improved job scenario,” he expressed.
Even though the monetary policy committee’s decision to maintain a status quo was widely expected, developers, who were expecting a reduction in rates, have voiced their disappointment over the RBI move.
Sharing the concerns of the sector, Sanjay Dutt, MD & CEO, Tata Realty and Infrastructure Limited stated, “It’s a good news that RBI continues to maintain the Repo rate unchanged. However, considering that the economic growth forecast for the current fiscal 2021-22 has been revised to 9.5 per cent from the earlier 10.5 per cent, Government should ensure that inflation is kept under check. The cost of steel, cement, labour cost and other items have gone up threatening the viability of certain projects especially those who are looking for last mile funding. The residential sector is slowly reviving as people seek to invest in safe havens for peace of mind and security amid this second wave. The rationale of lower interest rates/EMI, attractive prices, ready to move inventory, protection under RERA and attractive schemes from developers, encouraging homebuyers to invest now instead of waiting. While the government has been introducing several initiatives to help the sector, we request for some strategic support in the form of giving us industry status, input credit, allowing FDI in RTMI, single window clearance mechanism at State level, lowered GST on raw materials etc. for sustainable long-term growth and benefit of the developers as well as homebuyers.”
The real estate broker’s community too while welcoming the accommodative stance was of the view that more needs to be done.
78% developers are of the opinion that stamp duty waiver and reduction will help in demand creation. As many as 75% believe that input tax credit on GST and others will improve financial viability of projects. As many as 66% say that loan restructuring will help alleviate financial constraints.
Dhruv Agarwala, Group CEO, Housing.com, Makaan. com & Proptiger.com opined, “Considering there have been widespread economic ramifications of the various lockdowns announced by states to contain the second wave of the virus, this was the appropriate thing to do. However, we expect the banking regulator to announce monetary support to the NHB to revive growth in the real estate sector, which is the country’s second-largest employment generating sector in India. The developer community might find some support from the central bank’s decision to launch the Resolution Framework 2.0, under which the RBI will expand coverage of borrowers to Rs 50 crore, from the earlier Rs 25 crore. In a move that augurs well for small businesses in the country that are reeling under the impact of the second wave, the RBI has extended the special liquidity facility of Rs 16,000 crores to SIDBI to support MSMEs.
Ankit Kansal, Founder & MD, 360 Realtors expressed his views, “It was expected that RBI will keep the Repo Rate unchanged and avoid temptations to further inject liquidity due to the downside risk of inflation. As steel, cement, and crude oil prices are increasing, there is a mounting pressure of inflation and maintaining an accommodative stance is a benign choice. Coming to real estate, pent up demand, structural transformations, and a healthy economic outlook (~ 8-9% for FY 22) will drive the market in a positive direction. However, governing agencies should look into rising prices of key construction materials such as cement and steel. Prices have hiked exorbitantly in recent months and if not contained, it will undermine and stall a lot of construction activities.”
While, RBI’s resolve to keep low interest rates will help fuel the recovery of the overall economy, for real estate, it’s announcement on LRS will help as it will boost remittance from NRIs that have been huge investors in Indian real estate. But, in the present scenario, the real estate sector needs further concessions and reliefs to come out of the dire straits, it finds itself in.