Saturday, January 31, 2015

Role Of Interest In Loans And Deposits

Home loan growth slows down-Hindu Business Line-31.01.2015

Beena Parmar

Mumbai, January 30:  
Aman, a 32-year old in suburban Mumbai, is not particularly excited about the interest rate cut by the RBI earlier this month.
“I want to buy a house at a place which is less than an hour’s commute from my work place. However, there is nothing available in my budget. A cut in the interest rate will barely save a few thousand on my EMIs. I don’t think it is a good enough reason for me to buy a home,” said Aman, who earns a salary of ₹10 lakh annually.
This trend is the general sentiment in metros with real estate prices at high levels and no sign of “affordable housing”. Clearly, a rate cut is unlikely to lure consumers to take home loans.
Most banks have seen some consolidation in the housing loan portfolio and retail growth was primarily driven by vehicle loans, consumer durables and unsecured loans.
“Housing is not growing as much and though the interest rate cut will give a push to this demand, I do not expect the growth to pick up any time soon..,” said Jairam Sridharan, President, Consumer Banking at Axis Bank.
The pace of growth of home loans declined to 16.4 per cent in November 2014, from 18.1 per cent in the year-ago period, according to Reserve Bank of India data.
On the other hand, growth in consumer durables and other personal loans improved to 46.8 per cent (32.8 per cent in the year-ago period) and 16.2 per cent (13.3 per cent), respectively.
A 0.25 per cent reduction in base rate on a ₹50-lakh home loan, with tenure of 20 years (average ticket size for metro cities), will lower the EMI by about ₹830 per month if the bank’s interest rate gets lowered from 10.15 to 9.9 per cent.
This translates into a savings of only ₹9,960 annually. With consumers finding it difficult to buy high-priced homes, the reduced EMIs are hardly a solace.
According to analysts, the repo rate (the minimum lending rate of banks) is likely to come down by a full percentage point (100 bps) over the next 12 months, which means the amount of saving on EMIs could be in the range of ₹3,000-4,000 a month.
Bankers suggest the repo rate cut of 25 basis points (25 bps) is not enough, though the downward cycle of interest rates has started.
A larger cut in the days to come will lead to banks cutting base rates and therefore a significant drop of about 100 basis points will trigger some momentum in the home loan segment.
Affordable housing

However, the real estate market has witnessed a re-orientation and developers are now largely focusing on affordable homes. This will go a long way, though definitely not all the way, in bridging the existing wide gap between demand and supply of affordable homes, according to a report by real estate consultant Jones Lang LaSalle (JLL) India.
Anuj Puri, Chairman & Country Head, JLL India, said, “In 2015, developers will become more earnest about right-sizing and right-pricing their offerings. Smaller, yet better-designed and more efficient homes will define the residential real estate market in 2015, and selective corrections in some of the over-priced cities will help bring about faster sales for stagnated supply of larger configurations. Townships will become more prevalent, and the supply of luxury homes will moderate to align with the slow demand dynamics for these offerings.”
My comment: 

It is reported in news that despite cut in interest rate on home loans growth rate of home loan is coming down year after year.This is absolutely right that interest cut on home loans is not going to make any positive impact on home loan portfolio of any bank. Rate cut is not going to help builders who are finding it difficult to sell their flats. Because rate cut is such a relief which to a home loan seeker is nothing but a drop in the ocean. Burden of cost of house is heavier than burden of interest on a buyer of home . A person can manage  to bear with  monthly rise in EMI burden caused to him by one or two percent rate hike in interest rate on home loan by curtailing a little amount of family expenses to enjoy the fruit of ownership of home.
Cost of home for poor and for middle class or for even upper middle class individuals is too high to afford. Price of flats and homes or landed property in general  during last five to ten years has gone by five to ten times and gone beyond the reach of common men. A house or flat which could be purchased in the year 2001 in rupees two lacs  cannot be purchased even by Rs.50 lac in the year 2014. To add fuel to fire , if a flat is sold in Rs.50 lac , seller will demand Rs.25 lac or Rs.30 lac in black and rest in white money through account. For a honest salaried class person it is not easy to manage Rs.30  or Rs.25 lac as margin contribution for availing home loan of Rs.20 or 25 lac.
In such position salaried class or poor person whose income is hardly Rs. five lac a year cannot dream of buying a home of Rs.50 lac even if it is available on loan at lesser interest rate. Because bank can give loan to the extent of 80 percent of cost in white i.e. 80 percent of Rs.50 lac comes to Rs.20 lac  . It means a loan of maximum Rs.20 lac can be available for a house of Rs.50.00 lac. It means the person has to manage Rs.30 lac from his own source which very few salaried class can afford to manage.
It is therefore true that only rich class people find it beneficial to buy flats . They buy not one or two but even  ten or twenty or even hundreds of flats. Because buying a flat or home or land for rich people is the safest heaven to park black money. Rich people use real estate property as an investment opportunity unlike common men who use it as a shelter for family. They (rich who cam afford black money in huge value)get loan at cheaper rate and get even tax relief. After three to four  years, they sell the flats at double or triple  of invested original amount and earn many times of their investment . They grow rich by investment in landed properties.

In few years builders  become billionaire like DLF or UNITECH or HDIL because the realise many two to three time of their actual cost of construction. If entire cost of construction ialong with cost of land comes to Rs one thousand per sq ft , they will sell the house at Rs.3000 to Rs.5000 per sq ft. There is no control of any agency or any government on profit making because the government claim of reformation and privatisation and complete freedom to builders.  

 Not only this cost of land escalates to Rs.5 ooo per decimal to 100 lac a decimal. Common men cannot dream of buying even a decimal of land. There is no doubt in it that  it is rich and affluent class people and builders who has made land , flats and all landed property , residential or commercial so much costly that Aam Admi cannot afford , even on loan. There is close nexus between rich people and builders because it former who give black money to almost all builders for construction of flats and commercial shops.

 Rate of interest is low or high , it does not matter much for persons who do not have capacity to manage capital cost or margin money for loan or who do not have repaying capacity if they avail higher amount of loan from banks.
In this way , builder earn crores of rupees by escalating prices of land , flats and readymade houses. For this purpose they will buy land in the outskirts of the town at Rs.1000 to Rs.10000 per decimal , develop it, and build hundreds of flats and sell the same at Rs.30 lac  to Rs100 lac or even more . As soon as a builder start building an apartment or mall or commercial houses or shops, price of land in that area start going up at an accelerated speed. In such case , even if banks lower the rate of interest on loan they sanction for buying a home ,Common men , you say 80 percent of population cannot dream of buying a house or availing a loan for buying a home.

To add fuel to fire , dishonest builders use to advance payment from  proposed buyers of flats or shop and delay the project for longer period to enjoy interest free advance from flat buyers. There are many builders who fail to provide flats to persons who booked it by giving part of almost full payment. For many years , there is proposal in air that the government is contemplating setting up of regulating body on builders to control and contain price rise. But God knows when the nexus between black money holders, builders and politicians will break .
It is therefore need of the hour that Government reconsider, reframe and revisit housing loan policy or interest rate or tax concession for home loans and try to frame such a policy which stop price rise, which stop exorbitant profit making by builders and stop rich investing black money in landed property which results in land price and home price. GOI will have to assess whether tax concessions given to home loan takers are going in the hands of rich or common men. GOI will have to stop role of black money in real estate business. They will have to control and if need punish dishonest builders to create positive environment for real growth in home loan portfolio of banks as well as to give great relief to aspirants of flat who have been cheated by dishonest builders. Instead of reduction in interest rate , GOI can take effective steps to stop dishonesty of builders who more often than not cheat buyers in rates, in areas, in registration of flats and  who construct building even on authorised land or illegal land or in the land whose owner have not given consent to construct house and sell .
Taking steps to improve savings rate:
Jayant Sinha-The Indian Express
Union minister of state for finance Jayant Sinha on Friday said the government is taking steps to improve the savings rate in the country and growth rate in the economy.
“Savings rate in the country had gone down from the 36 per cent level to 30 per cent in the previous regime. We are changing that,” Sinha said at the National Co-operative Bank conclave organised by Express group publication Lok Satta.

“The government led by Narendra Modi is pro-poor and pro-business. Then only we can develop an ecosystem that can generate enough resources for the development of the country,” he said. “Even as we make in India, there should be an awaken India.”

My Comment: 

 A few years ago, GOI gave freedom to banks to decide their rate of interest on savings deposits. Prior to it,  in the year 1991 GOI had given banks freedom to decide their rates on interest structure for various types of loans and term deposits of various tenure. Private banks took advantage of this freedom and their CASA is now higher than that of PSU banks who did not increase interest rate on Savings deposits and who could not increase rate of interest on term deposits because they were under pressure of GOI to keep lending rate low so that builder can sell flats and car dealers can sell cars.

It is proper to point out here that personal loans or mortgage loans or loan to pensioners are not available at cheaper rate as it is available to car buyer or flat buyers. These loans are normally sought by poor families, retired families and middle class families to meet abnormal rise in expenses due to some reason or the other. Rich and affluent class of people only can dream of buying a car or a home.

It proves that benefit of interest rate on savings made by common men is not attractive and neither loans for personal need are attractive for common men. It is also true that rich people normally invest their surplus either in business or invest in gold and real estate properties. They seldom keep their money in savings deposits of banks. It means savings deposits made by poor and middle class families form large part of CASA in banks. And unfortunately these banks give benefits low cost CASA to rich people in various types of loans and charge higher rate of interest on personal loan, mortgage loans, pension loans etc. Banks cannot increase interest rate on deposits to keep lending rate low so that rich class may be served better and oral advices of ministers can be abided in true spirit.

All policies are directed to give benefit and relief to rich and to person of high net worth. As such savings rate has been continuously falling and investment in gold or real estate by rich is increasing by leaps and bounds. It is true that savings rate in the country has come down from 36 to 60 percent to 30 percent and below.

Only a little section of salaried class who are in higher bracket of income can afford buying a home or landed property . For persons who live in metros or big towns and cities , poor and middle class families cannot dream of buying a home or availing a loan . And if they have some surplus after spending for daily needs . they like to deposits in banks . But since interest given by PSU banks is too low , they become victim of chit funds or NBFC or private bans where probability of losing principal money is more. Interest gain on savings made by poor families in bank deposits is normally less than money eroded due to rising inflation rate and hence it is always beneficial for savers to park money in gold or in landed property or deposit in private banks or in chit funds.

Lastly it is ironical that on the one hand government advocate lower rate of interest on loans sanction by PS banks to ensure credit growth  , on the other they want to increase savings rate by keeping low rate of interest on deposits.

No comments:

Post a Comment