How recent RBI measures will push housing loan products to create real estate demand

And with the policy support by the Government, the Indian Real Estate market was on a bull run and nothing and no one was going to slow it down.

Oct 30, 2020 09:10 IST India Infoline News Service

In 2019, IBEF researched the Indian Real Estate Sector and summarized it by stating that the industry is at its peak and it is only going to strengthen from here on. According to its report, India was among the top 10 price appreciating housing markets internationally. There was a growing demand for space from sectors like Education, Health care, E-Commerce, and Logistics. Co's living market size was expected to grow more than double by 2025. And with the policy support by the Government, the Indian Real Estate market was on a bull run and nothing and no one was going to slow it down.

In December 2019, reports were coming from China about a novel virus that was spreading like a wildfire and made the entire country come to a standstill. Other countries had no idea what was to come shortly and continued their business as usual. In February 2020, the virus had started spreading to other countries. No Government was prepared for it and by the time they could realize the severity, the virus had spread everywhere. India was one such country affected deeply by it. The Indian Government in March 2020 announced a nationwide lockdown for 21 days. And since the spread could not be brought under control, India kept prolonging the lockdown. And the outcome was not that of a virus under control but that of an economy spiralling down uncontrollably.

Every sector took a massive hit. Many businesses had to shut down. The real estate sector was no different. Every on-going project had come to a standstill. With the loss of employment, no one was in a position to invest in real estate. The economy crashed and so did the real estate sector. The impact was so huge that India’s GDP went down by 25 percent in the second quarter of 2020.

In the real estate sector, property sales went down by 80 percent. New launches suffered a drop of 75 percent. The market was sitting on an unsold inventory worth Rs. 3, 70,000 crores.

The Government realized that it cannot let this continue. So the RBI in its recent Monetary Policy discussion introduced a few policies which brought upon a much-needed cheer for the Real Estate sector. The RBI has decided to rationalize the risk weights and link them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022, as against the existing regulation where the differential risk weights are applied to individual home loans, based on the size of the loan as well as the loan-to-value ratio (LTV). The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate.

With the revision in the risk weightage, the requirement of capital provision for banks will come down. This will encourage banks to push housing loan products with attractive features. It is predicted that such loans shall attract a risk weight of 35 percent where LTV is less than or equal to 80 percent and risk weight of 50 percent where LTV is more than 80 percent but less than or equal to 90 percent. This is a huge boost to the real estate sector and also a major attraction to the banks who lend to the real estate sector. What this policy does is, encourage the banks to make their loan products more attractive and which in turn will result in high credit flow to the real estate sector.

These policies were a much-needed boost for the real estate sector. And it has come at a very right time. With the restrictions on lockdown slowly easing up, the market will open up slowly but surely. And this policy puts less strain on the buyers as well as for the developers. Also, the real estate sector in the recent past is on the path of recovery. According to some reports, the serious homebuyers' inquiries are currently at 50 percent as compared to the pre-Covid-19 situations at the top tier cities. The NRI enquires are also on the rise due to the weaker rupee and the return of many Indians from foreign countries due to the pandemic situation. 

So these policy introductions have been welcomed by all the industry leaders and experts. This is indeed very morale-boosting efforts taken by the RBI. The RBI governor also stated that inflation will surely decrease in the next three months. So by such measures from the RBI and the Indian government and the sustained efforts by the real estate leaders, our industry will surely come out as a winner soon.

The author of this article is Ms. Swapna More,Co-founder of KAGAAY and State Chairperson- CIMSME

The views and opinions expressed are not of IIFL Securities,

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