Finance Minister P Chidambaram extended reassurances to real estate developers, stating that the government is set to urge banks to speed up their lending activities, a crucial support for a sector grappling with one of its most significant slowdowns in recent history. A group of builders, representing the Confederation of Real Estate Developers’ Association of India (CREDAI), had a meeting with Chidambaram on Wednesday, expressing their concerns regarding the banks' unwillingness to disburse loans to real estate firms.
Sources present during the discussion noted that the government acknowledged real estate as a vital engine driving growth. In light of the looming threat of economic slowdown, the sector was identified as a potential avenue for revitalization. According to reports, Chidambaram assured the delegation that the government would not only facilitate increased liquidity in the financial system but would also strive to lower interest rates.
The real estate market has faced considerable setbacks over the past couple of years, largely due to an upsurge in interest rates, which rose from 8% to approximately 12%. This increase in rates was a response to the rapid rise in real estate asset prices, which raised concerns at the Reserve Bank of India (RBI) regarding the formation of a bubble. To mitigate the situation, the RBI tightened its provisioning norms, making access to capital for the sector more expensive. Simultaneously, with inflation soaring past 6% in the last nine months, the RBI took steps to restrict liquidity to control price hikes.
Such a dramatic increase in interest rates resulted in an astounding 40% rise in the equated monthly installment (EMI) for loans over the same period. This spike adversely affected buyer affordability, consequently dampening housing demand. From the discussions, it emerged that the Finance Minister indicated an evolving scenario where policies would be adjusted to reduce home loan interest rates, thereby enhancing affordability for prospective homebuyers.
Additionally, it is believed that the RBI is contemplating the removal of the elevated risk weightage on home loans, which would empower banks to extend loans at more competitive rates. Currently, banks are mandated to hold a larger capital reserve against home loans exceeding Rs 30 lakh, causing interest rates for these loans to be nearly one percentage point higher than those for loans below Rs 30 lakh.