Mortgage reforms herald good tidings for home buyers 

Some recent interventions by the central bank and the government can trigger a higher credit growth, providing a much-needed fillip to the housing sector. This is thanks to the cut of 25 basis points in its short-term lending rates by the Reserve Bank of India (RBI), the newly reformed lending rate regime for faster transmission of rate cuts and a host of mortgage reforms.

The RBI's move is, no doubt, below the expectations of the corporate sector that was demanding a more substantive cut of 50 basis points in order to push up demand and growth. But taking a cue from last year's experience, the central bank seems to have taken a conscious decision not to create a false sense of satisfaction.

Ever since the RBI kicked in a lower interest rate cycle in January 2015, it has effected five cuts (including the recent one) with cumulative rate cut of 150 basis points but not even half of such a cut has been transmitted on. In this context, Governor Raghuram Rajan has said categorically that the central bank did not want to effect a higher rate cut at a time when there's a transmission overhang. Instead, he wants the past cuts passed through first so that further rate cuts can happen.

But then, this recent rate cut that follows the 2016-17 budget is no routine one, as it comes since the fiscal deficit is being brought down to 3.5 percent of GDP to make way for more and cheaper funds to the private sector.

It also comes with a slew of reforms that bode well for the housing sector. Before initiating the cut, the Reserve Bank on April 1 introduced a new lending regime aimed at ensuring that EMIs are in line with key rates, helping banks to quickly pass on the lowering of their short-term lending rates.

The RBI brought in a new marginal cost of funds-based lending rate concept, taking into consideration only the marginal cost of funds raised by banks, replacing the earlier system that was inefficient in transmitting the rate cut. Under the new rules, banks will need to adjust their lending rates every month.

Lack of liquidity has been hampering banks' ability to transmit the rate cuts into lower lending rates on commercial borrowings. To reverse this situation, the central has lowered the minimum daily cash reserve ratio from 95 percent to 90 percent, clearly reflecting its accommodative stance in the event of banks facing short-term liquidity mismatch, leading to greater liquidity in the banking system.

The new framework will ensure banks have a leeway to manage their liquidity and lower the lending rates especially as they can now borrow for short term requirements under liquidity adjustment facility by paying lower additional interest, over and above repurchase rate.

A significant highlight of the newly introduced system is that it will ensure that not just the current but even the past rate cuts get transmitted. That's precisely why after its introduction and even before the announcement of the 25 basis points rate cut, a couple of big commercial banks cut lending rates by 10 basis points.

Bankers expect further lowering of lending rates at least by 25 bps in a month or two, though fresh provisioning of non-performing assets at the time of announcement of fourth quarter results may pose some hurdles.

Yet, it is unlikely that there will be another rate cut by the Reserve Bank in its next bimonthly policy review in June. This is because of several variables, such as retail inflation, monsoon, liquidity and global economic environment and the central bank's insistence on ensuring the transmission of previous rate cuts.

However, the new marginal cost of funds-based lending rate regime and new liquidity framework, together with a host of other recent reforms, hold promise for better credit flow. The National Housing Bank changed its eligibility criteria, enabling more housing finance companies to avail refinance. The government is also considering a proposal to allow Employees Provident Fund (EPFO) to deploy 15 percent funds towards housing finance companies to boost credit flow.

The government, through its budget, also took some reform measures. It included increase in the time limit from three to five years to complete housing projects, in order to facilitate home buyers to avail tax reduction of Rs.200,000 on interest paid on home loan. Also announced was an additional yearly rebate of Rs.50,000 on home loan interest for affordable homes to first time buyers to push demand.

All these, along with the supply of durable liquidity through mortgage reforms, more funds will get freed up for credit take off for individual home loan borrowers and companies. This should result in a positive cumulative push for housing.

By Vinod Behl

(The author is editor, Realty Plus, a leading real estate monthly. The views expressed are personal. He can be reached at [email protected])