RBI`s rate cut to benefit realty companies: Knight Frank

By Naushad Panjwani, Executive Director, Knight Frank India

The 50 bps reduction announced by the RBI will give a huge sentimental boost to the real estate sector in general and the housing loan segment in particular. Though this rate cut does not affect the fundamentals of the RE market. We have seen a steady off-take in housing loans despite the high interest rates and real estate prices. This cut will only give it an extra fillip. However the larger impetus will come from the other measures. At present, UCBs are permitted to assume aggregate exposure on real estate, commercial real estate and housing loans up to a maximum of 10% of their total assets with an additional limit of 5% of their total assets for housing loans up to Rs 1.5 million. In order to facilitate enhanced priority sector lending, it is decided: to permit UCBs to utilize the additional limit of 5% of their total assets for granting housing loans up to 2.5 million, which is covered under the priority sector.

The Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board, especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

It is felt that the removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate. Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard. Accordingly, it is proposed: not to permit banks to levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.

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