India property: RBI's Diwali gift

Just ahead of Diwali, it seems the Reserve Bank of India (RBI) has played its trump card to attract fence sitters in a sluggish property market. India’s central bank has made it easier for those in the lower income bracket to purchase a property in the country, though details on implementation are awaited.

On October 8, the RBI announced that Indian banks could now provide home loans up to 90 per cent for properties costing Rs3 million or less. The provision benefits home seekers, both locals and non-resident Indians (NRIs), who are looking to buy properties above Rs2 million, the earlier loan ceiling.

Once officially notified by the RBI, Indian banks will be able to implement the guidelines. In a circular, the RBI said that in the case of individual housing loans falling under the loan category of up to Rs3 million, the loan-to-value (LTV) ratio is now up to 90 per cent. For properties between Rs3 million and Rs7.5 million, the LTV is up to 80 per cent and for homes above that, the ratio comes in at 75 per cent.

The decision comes in the wake of RBI reducing the repo rate at the start of last month, which means homeowners can now benefit from two RBI pronouncements.

While making the rate cut, the RBI governor Raghuram Rajan had told the media, “The cut is not a Diwali bonus. It is based on progress on the ground.” When asked if he was being Santa Claus or a hawk, he retorted, “My name is Raghuram Rajan and I do what I do.”

The central bank also modified the provisioning of risk-weight norms for home loans. Risk-weight norms are the financial agency’s evaluation and understanding on certain indicators that determine a lender’s risk-worthiness.

The major private and public sector banks reduced interest rates on home loans earlier this year after the RBI lowered the repo rate (the rate at which it lends to banks) by 0.5 basis points, but many smaller banks did not pass these benefits on to the consumer.

But looking at the bigger picture, Marghoob A Khan, Senior Vice-President, Corporate Banking division of Union National Bank, Dubai, says, “The RBI’s provisions would certainly help the lower income group, which is usually left out in the scheme of things.

“While such group may have resources to pay EMIs, it struggles to mobilise the down payment. Improving the LTV will greatly benefit the below-three-million-section customer.”

However, the banker, who owns  properties in India and won’t shy away from buying more, says, “The big question is — how many options does one have for buying a property under Rs3 million in India?”

Mohit Gupta, 37, a senior executive working with a leading Dubai financial firm, says, “The limit should have been Rs5 million instead, considering the prevailing prices in the country for a worthwhile property.

“Still, undoubtedly, it’s the right opportunity for young NRIs to pick up a property back home, especially at a time when major banks have reduced interest rates on home loans.”

Nilav Nirad is both an investor and advisor on real estate. The director of the German bank Liechtensteinische Landesbank, which has a presence in Dubai and Abu Dhabi, agrees that the lowest slab should have been raised to assist the genuine end users of such investments.

“At the same time, it would be a great boost to the affordable housing segment where there is a huge thrust by the new government,” he says. “For NRIs, the main attraction is that with interest rates coming down, they can consider properties of a higher value, because ultimately they are likely to return home post retirement. Besides, with the residential real estate market remaining lacklustre, it will be a huge relief to the developers in releasing their units at a faster pace.”

However, Ravi Sinha, CEO of Track2Media, which runs Track2Reality, a Delhi-based online realty newspaper, believes the situation is not quite so rosy. “I have my reservations that NRIs will be tempted to invest in India at present, when the rupee is hovering at (65/66) against the dollar. “The chances of Indian currency falling further cannot be ruled out.”

He feels the situation was enough to scare the expat buyers, who would end up losing money in exchange rates even if the property would appreciate in the market. “NRIs would be conscious of Moody’s prediction that the Indian real estate will continue to face a challenging operating environment ahead. It also means there could be price correction or crash ahead. The ratings agency’s statement was issued last month.