RBI clamps down on easy money for developers

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The size of the mortgage market accounts for 8 per cent of the GDP. So any change in the rate of growth of GDP can impact this market. The size of the mortgage market accounts for 8 per cent of the GDP. So any change in the rate of growth of GDP can impact this market.
SummaryThe 80:20 scheme had benefited developers as they were getting funds at home loan rates.

Just a day before Raghuram Rajan took over from Duvvuri Subbarao, the Reserve Bank of India restricted banks and housing finance companies from funding the 80:20 scheme floated by developers. The restriction will raise the upfront cost of a home loan but makes the banks aware of the risks in giving out loans where the collateral is often only the goodwill of the borrowers.

But the timing has made analysts note the circular. At a time when the new Governor had something to offer for almost every sector, singling out some of the practices of the real estate sector shows he is aware of the risks it poses.

RV Verma, chairman of National Housing Bank said the RBI warning was necessary. “Our data shows the first signs of correction are coming through”. He is referring to the NHB Residex which shows of the 22 cities it tracks growth has come off by one to five per cent in most of them in the first quarter of FY’14.

All this at a time when the mortgage rates continue to rule high. Major real estate markets are facing a drop in number of transactions and softening in prices and pockets in various cities facing an oversupply situation. Rajan has reason to be concerned. The size of the mortgage market accounts for 8 per cent of the GDP. So any change in the rate of growth of GDP can impact this market.

“Areas such as Yamuna Expressway, Greater Noida, Noida Extention, Gurgaon Extension, and pockets in Pune are facing a situation of oversupply,” said a real estate market expert who did not wish to be named.

But Keki Mistry, vice-chairman of HDFC is confident the demand for housing will remain strong. “Yes, luxury markets, say the demand for a second or a third house could taper, but they constitute less than 1 per cent of the total housing market”. He is confident about the holding capacity of Indian home buyers and investors but if the demand slows down further which many are predicting, not only could prices start to crack but several developers may be forced out of the market.

“Already there are cases where some smaller developers are facing the finance crunch and while they have a parcel of a land with them they don’t have the financial strength to to go ahead with their projects. In many cases they are approaching bigger developers to

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