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Will PM Modi’s latest measures revive the real estate sector’s fortunes in 2017?

Prime Minister, Narendra Modi

On New Year’s Eve, Prime Minister Narendra Modi announced a slew of sops, after the 50-day window to deposit old Rs 500 and Rs 1,000 notes came to an end on 30 December.

Among the various sops that Modi announced were cheaper home loans for people from the middle and lower-income classes. He also asked banks to lower home loan interest rates.

The prime minister’s nudge, and the fact that banks are cash rich following the massive inflows in the wake of demonetisation, seems to have had its desired impact, with the State Bank of India cutting its marginal cost of funds-based lending rates by as much as 0.9 percentage points. Punjab National Bank, Union Bank of India, State Bank of Travancore, IDBI Bank and Indian Overseas Bank also reportedly announced rate cuts. Other banks, too, are likely to bring interest rates down in coming days.

But why are banks cutting interest rates?

Since 8 November, an estimated Rs 14.9 lakh crore has reportedly been injected into the banking system. This has left banks cash rich, and they now need to boost credit growth to deploy this excess money.

Will this mean a substantial reduction in your EMI outgo or repayment tenure?

While banks typically do not change EMIs for existing loans, they do alter repayment periods as interest rates change. So, a Rs 50 lakh loan, which would have taken 300 months to repay at an EMI of Rs 42,475, will now take just 242 months.

Home loan rates are now at their lowest levels for several years. SBI’s three-month MCLR fell from 8.65% to 7.75%, while for one year the figure came down to 8% from 8.9%. To be sure, home loans are benchmarked to the MCLR and are marked slightly above the figure. A report in The Times of India says that while SBI had earlier kept the spread at 0.2%, it has now been changed at 0.6%.

This would mean that a new loan of up to Rs 75 lakh, which earlier would have been at 9.1%, will now be disbursed at an interest rate of 8.6%. Effectively, the EMI for a Rs 1 crore loan, with a period of 25 years, will now be Rs 78,850 as against Rs 84,950 earlier.

How do middle and lower-middle-income borrowers tend to gain?

A home loan of up to Rs 9 lakh stands to get a 4% interest subvention while that of up to Rs 12 lakh will get a 3% rebate. This subsidy on interest could mean that for a substantial chunk of lower and middle-income families who are living on rent, availing a loan and going in for their own house may become profitable, as their EMIs will now be cheaper than or at par with the rent. 

Moreover, as an additional sop to the rural population, which has been hit hard by his drive to demonetise 86% of the currency in circulation, Modi has allowed a 3% subvention for a renovation loan of up to Rs 2 lakh.

What impact could this have on the real estate sector?

The real estate sector has been hurt by demonetisation, especially the resale market, which was heavily cash dependent. Demonetisation, in fact, was a double whammy for the sector, which had anyway been grappling with a slowdown. In fact, a VCCircle report said last week that capital inflows into the real estate sector had halved in 2016, with the sector attracting just $2.4 billion compared with $5.3 billion in 2015.

Lower home loans could see the fortunes of the sector picking up, especially in the affordable housing segment in which the average loan size is in the Rs 10-12 lakh range. In fact, in his speech, Modi also said that the government will construct 33% more rural houses under the Pradhan Mantri Awas Yojana (PMAY).

Moreover, on 22 November, just weeks after it announced its move to abolish Rs 500 and Rs 1,000 notes, the government approved the construction of just under 2 lakh low-cost houses under the PMAY (urban), taking the total target to almost 13 lakh houses.

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State Bank of India is engaged in providing banking and financial services. It offers personal banking, agricultural, non-resident indian (NRI) services, international banking, automated teller machine (ATM) and corporate banking services. The firm also operates in capital markets, fund management, factoring and commercial services, credit cards and brokerage services. The company was founded in 1806 and is based in Mumbai, Maharashtra. State Bank of India operates as a subsidiary of the Government of India.

State Bank of Travancore (formerly known as Travancore Bank Ltd.) provides various banking products and services in India. Its personal banking services include deposit products, such as savings bank, current, term deposit, recurring deposit, unit and variable deposit, and no frills accounts; loan products comprising advance against deposits, gold loans, loan against shares and securities, housing loans, home decor loans, education loans, demand loans, loans against mortgage of immovable property, demand loans for pensioners, computer loans, car loans, two wheeler loans, and reverse mortgage loans; and public provident fund schemes. Its business banking services consists of micro, and small and medium enterprises financing; trade and services financing, term and working capital loans, flexi loans for traders, mortgage loan for trade and service sector, term loans and cash credits, short term loans, financing against rent receivables, financing contractors and wholesale distributors, and credit facilities; gold card scheme for exporters; debt restructuring mechanism for small and medium enterprises; and current accounts. In addition, the company’s non resident Indian banking services comprise various savings bank accounts, and fixed and term deposits; resident foreign currency, and rupee accounts; housing, education, car, and mortgage loans; and personal accident and health insurance plans. Further, the company provides insurance, mutual funds, credit cards, demat, custodial, international debit cards, travel cards, Internet and mobile banking, micro finance, agriculture finance, e-payment of taxes and duties, remittance, and automated teller machine (ATM) services. The company was founded in 1945 and is based in Thiruvananthapuram, Kerala. State Bank of Travancore is a subsidiary of State Bank of India.

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