The decision of the Reserve Bank of India (RBI) to hike repo rates of home loan products by 25 basis points, could make home loans costlier, but the revision of housing loan limits for Priority Sector Lending (PSL) from existing Rs. 28 lakhs to Rs. 35 lakhs may lead to the reduction in the interest rates on home loans up to Rs. 35 lakhs.
In this policy, RBI order to give a boost to the low-cost housing for the Economically Weaker Sections (EWS) and Lower Income Groups (LIG). It decided to revise the housing loan limits for eligibility from existing Rs. 28 lakhs to Rs. 35 lakhs in metropolitan cities, and from existing Rs. 20 lakhs to Rs. 25 lakhs in other cities, provided the overall cost of the housing unit in the metropolitan cities and at other cities does not exceed Rs. 45 lakhs and Rs. 30 lakhs, respectively.
Banks are required to lend around 40 percent of their total loans to priority sectors which include micro-enterprises, agriculture sector, and borrowers from weaker section and so on. However, default rates are higher in these segments, so banks may be tempted to lend more to those priority sectors where default rate is less. The default rate of home loans in the range of Rs. 10 lakhs to Rs. 35 lakhs is comparatively low. Therefore, bankers say the RBI’s decision would prompt lenders to lower rates in the small-ticket home loan segment to increase market share. The decision to increase the limit would be a big boost for first-time home buyers who are looking to purchase properties in the affordable segment.
However, the decision of RBI to hike the Repo rate by 25 basis points may lead to suppressed growth in the Indian Real Estate Sector which has shown much flexibility over the last 18 months. Indian realty requires lower interest rates to provide more pressure to ‘Housing for all by 2022’ which would also enable the sector to initiate the growth of the Indian economy.