Like the time immemorial debate as to which is first, ‘egg or chicken’, the never ending debate on ‘interest rate leverage’ for economic revival has been raised by the Finance Minister, once again. While the Government has the paramount right to lay down policies, the RBI is vested with the power of formulating credit policy applicable to banking institutions. What are the ramifications of this debate to a vital sector like real estate which contributes over 10 per cent to the Gross Domestic Product (GDP)?
The Reserve Bank of India Act is very clear that RBI enjoys the powers to regulate money in circulation. For this purpose, the RBI can lay down lending norms applicable to banks and financial institutions. It can also carry out periodical reviews of the policies. In the beginning, credit policies were announced twice a year, viz., ‘busy season’ and ‘slack season’. Such exercises are nowadays carried out quarterly, though these prescriptions are gradually losing their significance, especially in the case of sectors like property development or construction, which goes on all the year round and funds are laid out for long periods of 20 to 30 years.
Banks are no longer tied down to fixed rates. They can revise the lending rates depending on the health of their portfolios. In the case of housing, the government has been periodically revising its approach to affordable housing, which is treated as priority sector. The largest lender, viz., State Bank of India, has been focusing on the issue of increased lending, and the lending rates for housing from time to time. A very recent report states that the SBI is targeting on a daily home loan target of Rs. 250 crore. One can notice the publicity given by the SBI for the cheaper credit offered for housing loans to women and affordable sections of the society. From a lending rate varying between 10 and 12%, the current rates are hovering around 10.5%. In a scenario of rising interest rates, ‘fixed’ rate is preferred by the borrowers, whereas, in a reducing state, borrowers prefer a ‘floating rate’. The Reserve Bank has been waging a war against inflation and till recently, it has held the view that the inflation is unrelenting and there is very little scope for reduction in interest rate. The low or poor credit expansion has perhaps forced the Finance Minister to once again raise the bogey of ‘reduction in interest rate’. There is also a persistent demand for interest reduction by industry organisations. Nevertheless, a lower interest rate need not immediately up the borrowings by all sections of industry. Further, many senior bank executives air the view that there is a hard bargain from large borrowers for lending at prime lending rate and even sub-prime rates. Again, small banks rarely get the cake which is snatched by the big fish. This being so, performance of individual lenders may vary according to their client mix and size of the portfolio.
Individual lending rates The interest rates adopted by each bank normally depend on the cost of their deposit portfolio. Those banks who enjoy substantial chunk of low interest rate or interest free deposits can afford to lend at lower rates. Again, for lending to real estate which is for long periods, it would be necessary to match their deposits in tune with the lending. Each bank is always striving to balance its asset/ liability portfolios and maintain a decent ‘spread’ between the lending and deposit rates. In the case of lending to productive ventures, the funds are committed to only short term whereas, in the case of lending to real estate, both housing and infrastructure, the long-term commitments always dictate the risk profile which may change in the long run.
The point is not as to who dictates the interest rate for lending. All the players have designated roles. The anxiety of the government to promote growth is well understood. But, the RBI being an independent entity, the overall monetary considerations need to have the weightage for deciding crucial factors like interest rates. It would be in the interest of all concerned to have a cohesive and mutually supportive policies in crucial matters like interest rate decision.
As for the real estate sector, a low interest rate is likely to promote accelerated lending. Yet, the overall growth in the sector will depend on the passing on of the reduction to the ultimate buyer.
