Housing sector lauds RBI rate cut, but fears that NBFC crisis may douse the hope of lower EMIs

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Published: June 6, 2019 7:46:39 PM

Just two days before the RBI policy meet, Dewan Housing Finance Limited (DHFL) became the latest casualty after Essel Group, Reliance ADAG, etc in a series of defaults that started with IL&FS crisis.

Reserve Bank of India, RBI, RBI monetary policy, RBI rate cut, Repo rate, housing companies, real estate sector, NBFC crisis, Essel Group, Reliance ADAG, Dewan Housing Finance Limited, DHFL, IL&FS crisis, home loan EMI, lending rate, deposit rateThe entire NBFC segment is facing severe liquidity crunch after IL&FS crisis wrecked the financial sector.

Real estates companies have lauded the Reserve Bank of India’s (RBI) decision to cut Repo rate by 25 bps for third time in a row, which brings the rate, at which the RBI lends money to commercial banks, to 5.75 per cent.

“As per the latest data by the Government of India, the economic growth has slowed down to a 20-quarter low of 5.8 per cent during the last quarter of FY 2018-19. Also, the consumption has remained weak during the past several months due to the ongoing liquidity crisis, in spite of controlled inflation under 4 per cent. These trends have propelled RBI to reduce the repo rate for the third consecutive time to 5.75 per cent from 6 per cent. Even on the global front, factors like trade tensions and expected global economic slowdown had a bearing on the decision. The change in policy stance to ‘accommodative’ is the much-needed measure to boost the economy,” said Rmesh Nair, CEO & Country Head, JLL India.

But the realtors didn’t erupt in joy as just two days before the RBI policy meet, Dewan Housing Finance Limited (DHFL) became the latest casualty after Essel Group, Reliance ADAG, etc in a series of defaults that started with IL&FS crisis. After missing interest payments worth Rs 960 crore, DHFL has been downgraded from its erstwhile AAA/A1+ rating to BBB- (long term bonds) and A4 (commercial paper).

“The monetary policy decision to cut the policy rate is laudable. As the residential sector is already at inflexion point signalling a sustainable recovery, this decision will support the trend. This repo rate cut is likely to have a direct impact on the real estate sector, provided the banks, in turn, transmit the same by a corresponding reduction in lending rates. It has been observed that, despite 50 bps reduction in repo rates by RBI in the previous two reviews, the mortgage interest rate has remained sticky. As a result, the required benefit of the rate cut has not reached the home buyers. However, with regulations reinstating homebuyers’ confidence in the segment, markets witnessed recovery in sales in 2018. Further, in the January-March quarter of 2019, sales grew by 28 per cent as compared to the corresponding quarter in 2018. But commensurate transmission in interest rates will further boost residential sales momentum in 2019. Stronger implementation and continuity of reforms under the second term of the current government will uplift homebuyers’ sentiment,” said Nair.

No only DHFL, the entire non banking financial company (NBFC) segment is facing severe liquidity crunch after IL&FS crisis wrecked the financial sector. As a result banks and financial companies are reluctant to reduce deposit rates fearing that lower rates will discourage people from investing in fixed income securities, leading to further cash crunch. So, it’s simply not becoming feasible for the lenders to pass on the benefits of RBI rate cut by cutting their lending rates while keeping the deposit rates high.

“The RBI has cut interest rates, but notably, there were no other liquidity enhancing measures from the RBI. The banking sector regulator now needs to ensure that the monetary easing is transmitted to the real economy,” said Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services.

In fact, banks have lowered MCLR (marginal cost of funds based lending rate) based interests by just 5-10 bps since January, even as the RBI cut the policy repo rate by 50 bps during the perios, while a few of the public sector lenders including Canara Bank, Bank of India (BoI) and Bank of Baroda (BoB) have actually increased their lending rates since the April rate cut.

So, realtors are not optimistic that the benefits of the Repo rate cut will be passed to the home loan takers and lower their EMI amount, as there were no measures taken to infuse liquidity in the banking system.

“The unanimous decision by the Monetary Policy Committee (MPC) of RBI to cut repo rate by 25 bps and change its stance on liquidity from neutral to accommodative while lowering both the GDP growth forecast for FY 20 and inflation forecast for 4Q FY 20 is an unambiguous admission that it has failed to anticipate the sharp deceleration in India’s aggregate demand and remains firmly behind the curve in providing succor to the beleaguered economy. No specific measure has been announced that would provide immediate relief to the much-troubled NBFC sector. Though the Governor did reiterate multiple times that RBI will do whatever it takes to ensure financial stability of the system, but jittery markets are facing a crisis of confidence with respect to the precariously perched NBFC (including HFCs) and fixed-income mutual fund sectors. It looks highly unlikely that these broad, motherhood statements will assuage market concerns and specific and targeted solutions to rescue these besieged sectors alone can stem the panic and stop a further contagion. Inadequately forceful response to the IL&FS bankruptcy has already created fear psychosis among market participants, which is getting compounded by an almost blase treatment towards other troubled groups like DHFL, Essel, ADAG etc,” said Ajay Bodke, CEO PMS, Prabhudas Lilladher.

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