Points In RBI's Annual Report That Homebuyers Should Take Note Of

The starting remark in the Reserve Bank of India's (RBI) annual report gives the reader a feeling times may have been tough but India's economy has stood the test.

"Headwinds from the global slowdown and the transient impact of demonetisation notwithstanding, the Indian economy demonstrated resilience in 2016-17, marked by moderate expansion and macroeconomic stability, low inflation, and improvement in current account and fiscal deficits," says the report that assessed the period between July 2016 and June 2017.

Alright, then!

Now, what is there for those in the report who are planning to invest in property using bank finance? Let us look at certain points of the report that would interest homebuyers, existing as well as prospective.

Thankful for the kindest cuts

Typically, banks are seen unwilling to pass on the benefits to borrowers even after the RBI decided to reduce repo rate — the rate at which the central bank lends money to scheduled banks. Often, directives will be issued by the RBI governor to nudge banks to reduce interesting rates. However, financial institutions competed with one another while reducing rates after demonetisation. After Prime Minister Narendra Modi declared currency notes of high denominations illegal on November 8 last year, the banking system was replete with liquidity, and banks were willing to offer more to consumer at a lower interest rate.

“Post demonetisation, the pace of monetary transmission from the policy repo rate to banks' lending rates accelerated significantly,” says the report.

Sample this.

The Reserve Bank reduced the policy repo rate by a cumulative 175 basis points (bps) between January 2015 and June 2017. Banks reduced the one-year marginal cost of funds-based lending rates (MCLR) by a cumulative 77 bps between November 2016 and June 2017, even when the policy rate was unchanged.

“This is in sharp contrast to the decline in the median one-year MCLR by just 15 bps during the preceding seven months when the policy rate was cut by 50 bps. The largest reduction in MCLR post-demonetisation was effected by public sector banks, followed by private sector banks and foreign banks,” says the report.

However, this is not to say banks have fully passed on the benefits.  

“The pace of transmission to lending rates was significantly slower than to deposit rates and the MCLR on account of several factors,” the report added.

What is stopping the banks from passing the benefits on?

There are several reasons owing to which financial institutions have been reluctant to let consumers enjoy the full benefit of the reduction in policy rates. RBI data show that deposits which had peaked in December 2016, declined with progressive re-monetisation. Consequently, banks were reluctant to adjust their lending rates fully. As a result of this, among the various components of the MCLR, only the term deposit rates responded to the change in the policy rate.

Borrowers whose loans are still linked with the old benchmark – the base rate system—have not been able to avail of the benefits that are being offered to new borrowers whose loans are linked with the MCLR system.

“A sizeable share of past loans continues to be priced with reference to the base rate. As against a cumulative decline of 85 bps in the one-year median MCLR during 2016-17, the median base rate declined by only 10 bps over the same period, resulting in a slower pace of transmission to weighted average lending rate on outstanding rupee loans,” says the report.

Are homebuyers happier under the MCLR regime?

It must be noted here that the MCLR system was introduced in April 2016 “to improve monetary policy transmission to banks' lending rates”. However, “the higher lending spread maintained by banks in the wake of stressed asset quality of banks impeded transmission”.

Want to know what spread is, read this.

“Preliminary evidence suggests that while transmission of the policy rate to MCLR has improved, the transmission to lending rates has remained muted. This is because banks often adjust the spread they charge over MCLR – both in respect of the outstanding rupee loans and fresh rupee loans sanctioned by banks,” says the RBI report.  

An inter-sectoral comparison reveals that the spread between weighted average lending rate and one-year median MCLR increased across most sectors during 2016-17.

“While some change in the spread is inevitable due to sector-specific factors and the underlying risk, banks appeared to have also changed spreads to improve their net interest margins i.e. the difference between interest income and interest expenditure, to compensate for increased credit risk,” the report adds. 

On second thoughts: How is the sector going to fare?

As the environment is already seen improving, the central bank expects real estate to clock healthy growth in the times to come.

“Construction and real estate seem to be on the path of recovery as reflected in rebounding of new residential project launches to pre-demonetisation levels. Furthermore, government initiatives should provide a boost to the housing sector. On the whole, real GVA growth is projected to rise from 6.6 per cent in 2016-17 to 7.3 per cent in 2017-18, with risks evenly balanced,” says the report.

The move to give an infrastructure status to affordable housing, to provide improved customer protection and transparency through the real estate regulatory agencies, to modified policy norms on real estate investment trusts to address funding issues, etc., would prove to be a boon for the sector, the RBI expects.

Also read: Are You Ready To Take A Home Loan?