RBI’s inability to ensure transmission of repo rate cut is hurting real estate sector

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Updated: August 26, 2019 11:18:03 PM

Reserve Bank has asked the banks to link their loan rates with Repo Rate instead of Prime Lending Rate to ensure transmission of policy rate cuts.

RBI rate cut, Rajnish Kumar, NEFT platform,  FY20 growth, ICRA, inflation, NBFC sectorReserve Bank’s policy rate cuts have not reduced interest rates for retail borrowers.

Reserve Bank of India’s 110 basis point cut in the Repo rate this year has failed to uplift the mood in the real estate sector that has been grappling with the problems of high GST on construction materials like cement and steel and subdued demand due to the liquidity problem faced by housing finance companies and NBFCs. After the change of guard at the RBI in December last year, RBI governor Shaktikanta Das has effected a cumulative 110 basis point cut in the short term inter-bank lending rate, bringing it down to 5.4% but the transmission of policy rate cut down to the retail level has not taken place. Housing sector blames the lack of corresponding reduction in real interest rates for keeping the demand subdued ahead of the festive season when a large number of Indians prefer to buy a new property or assets.

“Banks have not lowered the retail interest rates despite several cuts by the Reserve Bank and it is hurting the real estate sector,” said Anuj Chaudhary, director of Delhi-NCR based Panchsheel Group.

Several other real estate developers in Delhi-NCR region were not upbeat ahead of festive season of Dipawali and Dussehra. This is the time when a large number of home buyers prefer to purchase new property and vehicles in addition to other valuables. Primary reason behind this lack of optimism is the RBI’s inability to ensure faster transmission of cut in policy rates.

RBI governor Shaktikanta Das has recently asked the banks to link their interest rates with Repo rate instead of Basic Prime Lending Rate (BPLR). India’s largest public sector bank – State Bank of India – has started offering loan products to new customers that are linked to Repo Rate. However, most of the banks and housing finance companies are yet to follow these instructions despite constant nudging by the RBI.

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“These measures are mostly at the discussion stage. They are yet to be fully implemented. They have failed to uplift the demand in the real estate sector,” a Delhi based real estate developer told Financial Express Online requesting not to be named.

“This is the government and Reserve Bank’s inability to ensure the transmission of interest rate cuts to the retail level that is hurting us,” he said.

This month, the government and the RBI have announced a series of measures to boost the liquidity of housing finance companies. Following the budget announcement, Reserve Bank has made available a credit line of Rs 1.24 lakh crore for non-banking finance companies (NBFCs).

National Housing Bank (NHB) has also announced a credit window of Rs 30,000 crore for housing finance companies this month. It is in addition to the two existing credit lines offered by the bank to HFCs. These liquidity boosting measures are aimed at pushing up the demand ahead of festive season buying in October-November.

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However, real estate companies don’t see any immediate relief as there are several other factors that are suppressing the demand. NHB’s liquidity boosting measures are primarily targeted at providing home loans for affordable housing segment. These measures don’t address long-standing cash crunch of the real estate sector which has been facing hardship in accessing the credit following the IL&FS crisis that spread to other NBFCs like DHFL and impacted other housing finance companies as well.

The ripple effect of ILF&S crisis severely squeezed other NBFCs and HFCs making it difficult and costlier for real estate companies to raise working capital or fresh loans from them to complete unfinished projects.

“These measures don’t address systematic problems faced by us. When we approach NBFCs to raise loans for the completion of our projects, they charge us 18-20% interest rates. In addition to high-interest rate they also demand several guarantees and compliance with other stringent conditions making it even more difficult for us,” Anuj Chaudhary told Financial Express Online.

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