RBI’s interest rate cut, loan moratorium extension will infuse liquidity in real estate sector

By Vandana Ramnani

Some realtors disappointed, say respite would have been greater had the long-standing demand of the sector for a one- time restructuring of loans been considered

The real estate sector welcomed the Reserve Bank of India’s decision on May 22 to slash the benchmark lending rate by 40 basis points to mitigate the impact of COVID-19 crisis and an extension of term loan moratorium by three months but said the respite would have been bigger had the long-standing demand for a one - time restructuring of loans been considered.

"RBI's announcements are a continued effort to increase private consumption and provide liquidity access to all sectors hit by the COVID-19 pandemic. These measures will help revive demand crippled by the lockdown," said Niranjan Hiranandani - President - Assocham and NAREDCO.

Reducing the repo rate by 40 basis points to 4 percent will help the banks provide additional liquidity access to all the sectors. "The industry welcomes the extension of term loan moratorium till August 31. The lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 2021.  This is a step in the right direction,” he said.

The RBI’s decision to convert the accumulated interest for the moratorium period into a term loan is also welcome. “It will also provide some relief as the borrower will not have to immediately repay the accumulated interest on the loan after the moratorium ends,” Hiranandani said.

"Industry though awaits one-time debt restructuring as a holistic measure to give a breather to the industries across the board and help in its quick revival,” he added.

RBI's move is expected to ease liquidity for developers and enable banks to lend even more. The repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market.

The loan moratorium will be extended till August 31, said RBI Governor Shaktikanta Das. This makes it a six-month moratorium. He added that the lending institutions are being permitted to restore the margins for working capital to the origin level by March 31, 202

In an off-cycle meeting of the Monetary Policy Committee (MPC), the decision was taken unanimously to cut repo to support growth. Following the reduction, the repo rate has come down to 4 percent and the reverse repo rate has been cut to 3.35 percent.

The MPC, headed by RBI Governor Shaktikanta Das, has last reduced the repo rate (the rate at which central bank lends to banks) on March 27 by a staggering 75 basis points to 4.14 per cent.

"Reduction of repo rate by further 40 bps will reduce the cost of borrowing and same being passed on to customers will increase buying capacity and increase confidence to invest in real estate asset," said Piyush Gupta, managing director, Capital Markets, India at Colliers International.

“The hard facts of declining consumption and a deepening economic slowdown in India are inescapable. All sectors including real estate have been severely impacted. To this gloomy backdrop, the RBI’s repo rate cut of 40 bps – from 4.40 percent to 4 percent now - is a welcome move. Simultaneously, for the second time in a month, the reverse repo rate has also been slashed by another 40 bps and now stands at 3.35 percent,” said Anuj Puri, Chairman – ANAROCK Property Consultants

This is another big step which will ease liquidity for developers - the rate cut will not only send out positive signals but will enable banks to lend even more. Thus, the rate cuts combined with the further extension of loan moratoriums by 3 months up to August 31, 2020 augurs well for the real estate sector in the times to come.

The repo rate cuts do uplift the sentiments of home buyers even further. Home loan interest rates have already gone down substantially over the last year, and are presently at an all-time low averaging between 7.15 percent to 7.8 percent.

Given the backdrop of an unprecedented economic situation, we are happy that the RBI has reduced the key policy rate and taken note of rate cut transmission to borrowers. The extension on the moratorium and improved terms will provide a breather to industry and household borrowers alike, said Shishir Baijal, chairman and managing director, Knight Frank India.

It would have been a big respite if the long-standing real estate industry demand for a one - time restructuring of loans were allowed along with the measures announced today. The expected contraction of the GDP is worrisomely emanating from a significant drop in private consumption. While the RBI has taken steps to boost liquidity, one of the real challenges remains boosting of demand which we hope that subsequent announcements will address, he said.

Some realtors said there are disappointed because their demand that existing project loans from banks and NBFCs should be rescheduled has not been met.

“The decision to cut repo rate by 40 bps and to reduce the reverse repo rate to 3.35% would provide more money with banks.  However, Naredco’s proposal that the existing project loans from banks and NBFCs be re-scheduled (one time) applying repo rate with a moratorium of 2 years irrespective of any status of the account as on March 1, 2020, and provision of last-mile funding for unfinished projects have not been addressed. The money available with banks is therefore of no benefit to anyone,” said RK Arora, Chairman of Supertech Group and president of developers’ body NAREDCO-UP.

"We expected more stringent measures from the RBI booster to revive the economy. The move of moratorium extension is a short term piecemeal solution to a long term problem. The interest rate should be reduced with firm liquidity measures as this is the need of the hour backed by one -time restructuring of loans to help the real estate sector from crumpling. RBI has tried to ease the pressure on borrowers and has extended group exposure limit for lenders to corporates from 25 percent to 30 percent but this is not enough to solve the ongoing liquidity crisis. The government now needs to ensure that banks are forthcoming and are passing on the benefits to us currently, there is a dearth of income in the sector owing to the COVID crisis," said Satish Magar, president, Credai National.

The move of extending loan moratorium for another three months will be extremely helpful in lowering the burden for those who are paying EMIs or using credit cards and lower financial stress. What needs to be seen is how quickly the banks reflect this change in their respective rates, said Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and Proptiger.com.

Affordable housing may benefit from the announcements. “Affordable housing will benefit the most as the buyers of this segment are particular about the EMIs. With historically low EMIs, people will go out to buy and thus boost demand,” said Pradeep Aggarwal, founder and chairman, Signature Global and Chairman, ASSOCHAM – National Council on Real estate, Housing & Urban Development.

Ram Raheja, director, S Raheja Realty said that the announcement of 40 basis points to 4 percent is a move directed towards the revival of the economy. The RBI should ensure that the benefits of the same are passed down to the end-consumers by the banks.

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