Loan burdens become marginally lighter

Since most housing finance companies have little leverage in deciding the interest rate, a drop in the rate of interest charged by HFCs is not expected to come into effect immediately. According to G. P. Khungar, a real estate consultant, “the provision in the Union Budget that 3 per cent (instead of 1.5 per cent prevailing earlier) of incremental deposits of banks have to be lent to the housing sector, will channelise approximately Rs 4,000 crore worth of funds to housing in a year.” Even thoughthis is barely 5 to 6 per cent of the sector’s financial needs, this additional Rs 4,000 crore will be available at a lower rate of interest. And overall, Khungar expects a 1 per cent drop in the interest rate available for housing loans.

Even property dealers — like Ansal Properties — are expecting a 1 per cent drop in interest rates. Meanwhile, HFCs like Housing Development Finance Corporation (HDFC) are still working at the new interest rates. Says Renu Sud Karnad, General Manager, Northern Region, HDFC: “We haven’t finalised the new interest rates as yet. HFCs don’t have very high margins, so the drop in interest rates won’t be substantial.”

However, P. P. Vora, Chairman and Managing Director of the National Housing Bank (NHB) feels that interest rates will definitely drop across the board. “On a Rs 2 lakh housing loan — that has to be given out at the existing PLR — there should be a 75 to 100 basis point reduction in interest rates. For loans up to Rs 5 lakh, the interest rates may come downfrom the existing range of 14.5 per cent to 15 per cent to around 13.5 to 14 per cent,” says Vora. The NHB chief feels that within a week, all banks will announce the new rates.

The interest rate reduction and the proposals for housing will certainly make housing more affordable. For instance, with the exemption limit from income tax on housing loan interest having gone up to Rs 75,000 from Rs 30,000, the effective interest rate on a Rs 5 lakh loan over 15 years has come down from around 15 per cent to about 10 per cent. The foreclosure laws will allow the middle-class to buy a property at the 10 per cent effective interest rate for up to 15 years, then sell it using the foreclosure laws and use the capital gains from that transaction to buy a new house taking another Rs 5 lakh loan at 10 per cent effective rate of interest for another 15 years.

But there are snags in the Budget proposals. According to Khungar, the income tax benefit given on housing loans in this Budget is only applicable to loans takenon or after April 1, 1999. This will bring no relief to the tax payers with an existing loan liability.

Siddharth Yog, Associate director, CB Richard Ellis — a real estate consultancy firm — feels that the finance minister should have increased the time-span of housing loans from 15 years to 25 to 30 years, as is the global practice. “The paying back capacity of individuals who take a Rs 2 lakh loan is limited. Even a monthly instalment of around Rs 2,000 per month is a heavy burden for them,” Yog adds.

Automobile finance

Though the Budget did not give the much sought after excise relief to automobiles, the cut in PLR by banks is expected to result in a 0.5 per cent drop in interest rates charged for automobile finance.

According Deepak Gupta, CEO, Kotak Mahindra Primus Ltd, the interest rates on loans taken for cars will drop by around 0.25 to 0.5 per cent. Since this is a forced correction and not one driven by market forces, Gupta feels that the buying cost of funds will come down onlyover a period of time. “People will wait for this sort of a reduction that could take around two to three months,” he adds.

At present, 800cc cars like Omni, Daewoo Matiz and Maruti 800 command an 18 per cent rate of interest on the reducing balance. Maruti Zen, Hyundai Santro, Tata Indica are loaned out an interest rate between 17 to 17.5 per cent. For mid-luxury cars, like Maruti Esteem, Daewoo Cielo, Mitsubishi Lancer and Honda City, the interest rate is marginally lower at 16.5 per cent. As of today, FIs are offering discounts against dealer incentives and templated discounts for various categories of customers over the interest rates given above. Moreover, corporate buyers get additional sops. And if Gupta is to be believed, the existing rates slabs of 16 to 16.5 per cent should fall to around 15.5 to 15.75. This means that the EMI on a Rs 1 lakh loan for three years would go down by around Rs 50 per month, while a similar loan for five years would bring down the EMI by approximately Rs 35.“Withcompetition, it is the customisation in the range of finance options and pre- and post-purchase service that will drive customer decisions,” says Rajeev Kakar, Business Manager, Automobile Finance, Citibank. He adds that factors like convenience and speed in processing loans will be the differentiators. Since almost 70 per cent of all cars today are bought through finance schemes, car manufacturers are busy bringing out attractive financing packages. For instance, Hyundai Motor India has tied up with the ICICI for a six-year loan scheme for the Santro. Maruti-Citicorp is offering a seven year loan for Maruti 800 and Zen.

The interest rates come down substantially when the manufacturer decides to subvent a scheme. Subvention is an arrangement between the car manufacturer and FIs whereby a certain amount of money or profit margin is given away by the car manufacturer. This amount is then used by the FIs to lower the rate of interest and thereby reduce the EMI.