It has asked RBI to direct banks to pass on the benefit of the rate cuts to NBFC/HFCs.
The real estate sector is unable to leverage the benefits of reduction in repo rates and appropriate directions should be given to banks to pass on the rate cut to NBFCs/HFCs to enable them to lend to the realty sector at a lower rate of interest, builders' body Credai has written to RBI Governor Shaktikanta Das.
It has asked the RBI to amend its circular issued on September 2019 to include NBFC and HFCs and give "appropriate directions to the banks to pass on the benefit of the rate cuts to NBFCs/HFCs to enable them to lend to real estate sector at a lower rate of interest.”
"…NBFCs and HFCs are the major source of financing to the Real Estate Sector and because of the impediments … the industry is getting access to finance at much higher rates," the letter by CREDAI noted.
The real estate sector is not able to leverage the benefits of this reduction in repo rates. The major restricting factor is that while the 2019 circular directs the banks to link the floating rates on housing loans to external benchmarks, the same is not made applicable to NBFCs and HFCs, the letter said.
Also, while the RBI has reduced 2.50 percent in repo rates since January 2019, the maximum reduction passed on by Banks to the borrowers has been between 0.7-1.3 percent, largely from August 2019 till date. In some cases, however, no benefit of repo rate reduction has been passed on at all, it said.
To combat the debilitating impact of the COVID-19 outbreak, the RBI on March 27 and May 22 made announcements to infuse liquidity in the system including reduction in repo rates and reverse repo rates, moratorium of three months each on payment of all installments falling due between March 1, 2020 and August 31, 2020.
Reserve Bank of India (RBI) in September last year had observed that due to various reasons, the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework had not been satisfactory and made it mandatory for banks to link all new floating-rate loans for housing, auto and MSMEs to external benchmark like repo from October 1. This was a move aimed at ensuring faster transmission of policy rate cuts to borrowers.
In 2019, the Reserve Bank had reduced the repo or short-term lending rate by 110 basis points, but the banks had reportedly passed on only up to 40 bps to borrowers. The external benchmarks, to which the banks are required to link their lending rates, could be repo, 3-month or 6-month treasury bill yield, or any other benchmark published by the Financial Benchmarks India Private Ltd (FBIL).Follow our full coverage of the coronavirus outbreak here