SECTOR TO GAIN FROM REDUCED BANKING RATES

In a move that will provide a huge help in driving the demand for real estate sector in our
country, a handful of banks have slashed their lending rates and a few have made a cut in
their deposit rates which is considered a sign for future reduction in lending rates. A drop in
lending rates means that the Equated Monthly Instalments (EMIs) are decreased which
provides an immediate relief to the pockets of the customers. Country’s second largest private
sector bank in terms of assets, HDFC Bank yesterday announced a reduction of 35 basis
points or 0.35 percent on its base rate bringing it down to 9.35 percent which will be effective
from today, from a previous 9.7 percent; currently getting it to the lowest in the industry
standing shoulder-to-shoulder with SBI and ICICI Bank. Also, the Bengaluru-headquartered
state owned Canara Bank reduced its lending rate by 10 basis points or 0.10 percent bringing
it down to 9.90 percent from 10 percent previously. Axis Bank will reduce its deposit rates by
0.2-0.5 percent across various maturities with effect from today signalling a future drop in
lending rates.
“The reduction in lending rates by banks is coming at the right time as we are inching closer
towards the final festive season of the year where most home sales takes place. It was also
important on the banks behalf that these rates were reduced as frequent nods had already
come from the RBI chief and by end of this month, another RBI review policy is awaited that
might see a rate cut only when the banking industry cooperates with the RBI”, states Mr.
Deepak Kapoor, President-CREDAI Western U.P. & Director, Gulshan Homz. Also agrees
Mr. Ashok Gupta, who is the CMD of Ajnara India Ltd. as he believes that “There exists a
direct relation between reduction in lending rates by banks and an increase in demand for
property. It is then just a matter of proper timing by the banks while adjusting the rates. Just a
month away from now we will begin with the festive season of the Hindu calendar where
massive demand is observed every year, and this is the time when potential customers plan
and allocate their funds for the big purchase. Thus, a fall in lending rates today will promote
the sentiments in the market and allow people to strategize their upcoming purchase”.
The Reserve Bank Of India had already provided the country with three rate cuts this year by
25 basis points or 0.25 percent on each occasion. In its monetary policy review on August 4th,
RBI governor Mr. Raghuram Rajan had deplored that banks had lowered their rates by only
30 basis points since the first rate cut in January this year despite RBI having cut its
benchmark rate by as much as 75 basis points since then. Mr. Rajan had also linked better
monetary policy show or banks cutting their lending rates to any future rate reduction by the
central bank. “The RBI has played its part seemingly well with already reducing the repo rate
by 75 basis points within this year with two more policy reviews left for this calendar year.
The ball is now in the banks court to pass on the benefits to the public otherwise RBI won’t
be too lenient in the upcoming policy reviews. This rate cut by banks is a welcome move as it
will further assist in boosting the demand for homes in the sector which has become the need
of hour considering rising inventory levels nationwide”, explains Mr. Kushagr Ansal,
Director, Ansal Housing. Adding to the view, Mr. Sudeep Agarwal, MD, Shri Group avers

“These surprise rate cuts by a few banks will put pressure on other lenders to bring down
their rates which will be largely favourable for the potential customers as they will have much
reduced EMIs to pay for their homes and at the other side, the future demand for property
market will see a correction as the overall cost of a unit on the customer will reduce
drastically. This also holds a big significance as further the banks reduce their rates, more
pressure will mount on RBI for its next review policy”.
Banks with high liquidity can easily afford to decrease their lending rates without touching
the deposit rates but banks with lesser liquidity are first forced to decrease the deposit rate
which on the other hand increases their liquidity then can they bear the drop in the lending
rates. A drop in the deposit rate directly leads to lesser returns on investments such as fixed
deposits, etc. Thus, major players of the banking industry are able to satisfy the complete
demand whereas other banks can either provide higher returns on investments or charge less
on the amount lent to the public. “Looking at the present economic scenario in the country,
the banks will have to create a perfect blend between providing higher returns on investments
or charging less on loans as on either side sentiments play a vital role in attracting customers.
Another way around can be, when RBI allows the banks to lend below the base rate
particularly for home loans, so that the demand for credit and property can be ignited the
benefit of which will go in the accounts of real estate sector and the banking industry”,
enlightens Mr. Rupesh Gupta, Director, JM Housing.
As more and more banks join the race of reducing the lending rates, it will be an all-win
situation for the public, and real estate sector will be the biggest gainer of them all. The prices
in this sector are witnessing its record fall for over a few years along with unprecedented
inventory levels that will now gradually benefit from this reduction in lending rates made by
banks. “Blaming on poor purchasing power, today’s population in India is making all the big
purchases on credit, thus making the role of Banks even more quintessential in how the
economic cycle circulates. As the lending rates are directly proportional to the EMIs, lower
Interest rates are the need of the hour. With the slash in lending rates by one of the biggest
banks in India –HDFC and Canara- the borrowers are at the happy spot. Especially with
festive season just around the corner, it was a wise step to shake the dormant sales in the real
estate sector”, concludes Mr. Rajesh Goyal, Vice President-CREDAI Western U.P. & MD,
RG Group.