New Delhi: The RBI has remarkably made a series of changes in Repo rates, cutting it down consecutively for three times within just a matter of months. The salient ramifications of these steps by the RBI will be apparent in every industry sectors and thereupon public life and assets. Its upshots are consequential in the real estate sector with sharp effect on home loans.
Repo rate is the rate at which RBI lends money to banks. The relation is proportional, reduced repo rates assist banks to get money at cheaper rates and vice versa. This was about RBI and banks; but what is its implication to ordinary consumers or the public? The term also implies the interest rates levied to borrowers by banks. Hence, Repo rate also means the interest rate on any loan that consumers borrow from banks.
Hence, the link between repo rates and home loans is clear. In fact, the recent rate cuts by the RBI were directed towards strategic impact on the backlogged property market of India. The present scenario of realty market is vague, primarily stained by pilling real estate stocks, unsold properties and apartments, adding to an enigmatic condition of realtors and property developers. The condition materialized to be such that, the RBI Governor himself had to plea for a “great help” if developers could reduce property rates to offer the little help in doing away with the recent impasse in the market. Against this backdrop, the rate cuts by RBI are expected to impact the realty sector on a positive note. As banks now can borrow funds at lower rates, reduced interest rates in home loans as well as reduction in loan EMIs are expected.
However, the expected ‘impact’ is entirely dependent on banks and their advances to change interest rates. Because, even if they can now draw money from RBI at lower rates; it is not mandatory for banks to offer the same amenity to customers. The fate of new realty customers in entirely dependent on base rate cuts, which is wholly under the control of banks. Only a reduced base lending rate means benefit of home loan consumers. As EMI is directly related to base rate, banks will have to reduce the interest cap on home loans to offer an actual assistance to the clogged realty sector. Banks may form up a nexus to control the base rate for home loans to a fixed percentage. This may be or may not profitable for new consumers and only banks and their strategies will determine the outcomes. Moreover, there is a possibility that banks may no longer offer waivers on processing fees and other freebies to counteract a possible reduction in base rates. The best way to deal with it is not to be skeptic and expect the best. It is certain that the BSFI sector will have to play a central role in moving the property market forward.
For existing home loan consumers, a relief can be expected from these rate cuts. It is clear that the reducing rates will impact consumers who has floating loan rates directly, leaving aside consumers who had fixed rate home loans. Reducing rates can affect existing consumers in two ways: either reduction in Home Loan tenures or in EMI. Generally, when loan rates are reduced, banks reduce loan tenure leaving EMIs constant as before. Customers with long-term loan tenures will be have a good relieve. The process is done by default and consumers do not have to undergo any formalities or paper works. However, to obtain reduced EMIs, consumers can contact banks or the financial institution and revise the terms and conditions of the loan. The revised ECS mandate for new EMI amount should be submitted. While deciding for these changes, consumers take into account a number of imperatives such as considering loan outstanding, remaining loan tenure, interest differential and other changes. Additionally, Fixed Rate Consumers can switch to floating rates to score some benefits. The recent rate cuts are rolled out in a strategic timing, just at the time of quarterly interest rate revision. Therefore, existing loan customers can get there revised rates cut down adding to their relief.
The reduced repo rate will have a momentous impact on the real estate sector. It is poised to boost affordable housing and improve sales through reduced home loan interest and reduced EMIs. The rate cuts will allow real estate pricing stocks to fall within the range of affordable housing. A reason for the backlogs in the market was the anticipation of buyers of reduced and revised property prices. The recent rate cuts materialized this anticipation into reality and considerable upswing on property sales is expected. Buyer’s sentiments being raised, the market will be proffered with good sales dynamics.
Policies rolled out by pledged institutions of the country have been solemn to perform at critical times. The recent rate cut by RBI is also such a measure that has multiple implications to the rising economy of the country. Real Estate being a cardinal aspect in the economic landscape, will be incurred a massive drive through these amendments.
(Author Anil Jindal is Managing Director of SRS Group)
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