banks-to-cut-down-their-lending-rates

Why is it important for banks to cut down their lending rates?

Namrata Roy
Indian real estate sector is witnessing a crunch due to sluggish market conditions. In such a scenario, it is important that the economic meters help Indian real estate market to get over the crisis. A positive move by the Reserve Bank of India (RBI) to reduce its key lending rates since last year has provided an opportunity to the real estate market that has been reeling under the pressure of slow market growth. However, the challenge that the industry has been facingis on passing the lending rate benefits to the home buyers.

banks-to-cut-down-their-lending-rates
Lending rates
Few banks have actually transmitted the lending rate benefits to the consumers and due to this home buyers are encouraged nowto invest in the property market. Last year, the lenders such as State Bank of India (SBI) had cut down lending or base rate by 0.4 per cent to 9.3 per cent.  HDFC’s base rate was at 9.3 per cent and Axis Bank had lowered its base rate to 9.5 percent. Indian real estate industry hailed these moves by the lenders as this  helped to ease out loan disbursement at a reduced rate of interest.  The country’s largest bank, the SBI is providing home loan currently at 9.25 percent, Axis bank provides home loan at 9.45-9.50 per cent and HDFC home loan is at 9.45-9.95 per cent, which is quite reasonable.

Observing the current market scenario, the RBI on October 4, 2016 has once again reduced its key policy rates to 6.25 per centby 25 basis points, which is surely a sudden positive move taken by the government to boost industry’s growth.Since January 2015, the RBI has cut 175 basis points in repo rate.The real estate sector is expecting such steps so that sales pick up soon and unsold inventory level slides down. Most recently, Axis bank has reduced its marginal cost of funds based lending rate (MCLR) by five basis points. In fact, ICICI bank, Indian Bank, Kotak Mahindra Bank, and Canara Bank have also reduced the rate of interest.

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Improve home buyer’s sentiments
These are some right decisions taken by the RBI at the right time when the real estate market is in a position of doldrums. Such moves will provide a much-need stimulus to private spending. The real estate consultant, Cushman & Wakefield pointed out that the lower home loan rates will now trigger greater optimism among home buyers and spur home-buying decisions, for both end-users as well as investors and revitalize the long depressed housing markets.

According to a Knight Frank H1 report, the drop in new launches and pickup in the sales volume have brought some cheer to the developer community, as the inventory pressure has eased off significantly in the last six-month period of 2016. The unsold units available in the market have reduced from 710,340 units in H1 2015 to less than 660,240 units in H1 2016 witnessing a 7% fall as compared to 2015. Among the top eight cities, Pune, Mumbai, Hyderabad and Chennai are leading in this unwinding of inventory. In addition, with the recent cut in lending rates may further help to move the unsold inventory particularly the ready-to-move-in properties over the next two to three months.
If commercial banks quickly pass on the benefits of the rate cut to loan seekers, we can expect a ‘real’ festive season for all stakeholders in the real estate sector as more buyers may actually decide to get off the fence and invest as most developers are already rolling out ‘festive offers’ to attract them. RBI rate cut happened at a time when the festive season is round the corner. The builders usually provide discounts and deals during Diwali season. Many developers have already started providing attractive deals or offers to attract real estate home buyers. The reduction in bank lending rates will further help to push property sales during the festive seasons.

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The finance ministry has plans to mull the union budget in early February 2017.  So, if there is another move of rate cuts by the RBI before or after the Union Budget, it will definitely help to spur property sales and inject fresh capital into the market, thereby, improving the home buyers’ sentiment.

The conclusion is that the real estate in India will likely to observe a revived market sentiment with new home buyers looking for ready-to – move-in properties as compared to new projects that will help further to reduce the unsold inventory levels.