Metros want Rs 20 lakh home loan ceiling raised

It is most likely that there will be an upward revision either in CRR or repo rate and so home loan rates could go up marginally.

With inflation rising, the run-up to the April monetary policy has been overtaken by talk of a likely increase in either the repo rate the rate at which the RBI lends to the banks or Cash Reserve Ratio the amount of funds that banks have to keep with the RBI but what seems almost certain is that home loan rates will either remain where they are or go up further.

Deepak Parekh, Chairman, HDFC, told The Indian Express 8220;it is most likely that there will be an upward revision either in the CRR or repo rate and so the home loan rates could go up marginally.8221;

But there8217;s another area which is causing greater concern, especially among real estate players and the others involved 8212; the Rs 20 lakh limit for priority sector lending. There8217;s need, they say, to revise the limit upward from Rs 20 lakh or introduce a differential limit for Tier I, II and III cities so that home buyers in larger towns too can benefit. The other way out, they suggest, is to increase the tax benefit limit of Rs 1.5 lakh for the interest component paid on a home loan.

Anuj Puri, Managing Director, Trammel Crow Meghraj, a multinational real estate consultancy, said: 8220;There are properties within the Rs 20 lakh limit in smaller cities but home buyers in larger cities are getting little benefit from it. I think there should be differential limits based on the tier of the town 8212; like Rs 45 lakh for Tier I, Rs 25 lakh for Tier II and Rs 15 lakh for Tier III cities. The tier classification can be based on the population of the town. Also the tax benefit limit of Rs 1.5 lakh on the interest component repaid should go up. This will bring down the post-tax interest cost for home buyers.8221;

Industry players are of the same view. Rajeev Talwar, Group Executive Director, DLF, said: 8220;Property prices have risen due to a supply gap created as a result of land not being released. There is need for Government to raise the limit for priority sector lending from Rs 20 lakh if they want the credit offtake to go up. Also the limit on tax benefit should be raised from Rs 1.5 lakh. The basic idea should be to allow the economy to flourish and there should be no artificial barrier.8221;

As of now, home loans up to Rs 20 lakh fall under priority sector lending across the country. But in recent years, property prices have shot up across cities. Prices also vary widely from city to city. While properties under Rs 20-25 lakh are available in Tier II and Tier III cities, it8217;s difficult to find properties in this range in metros like Delhi and Mumbai.

An industry expert said 8220;almost 60 lakh individuals have taken home loans and almost 50-60 per cent of these transactions fall within the Rs 20 lakh bracket. Most of these small ticket loans are in smaller towns while in metros and larger towns, this percentage falls to 15-20 per cent.8221; This is primarily because of the high property prices in larger towns. Clearly, the policy of keeping small-ticket home loan rate low is not benefiting borrowers, especially in the metros. Experts said it was time for RBI to go for a revision of limits and frame the policy in a way that meets requirements of home buyers across the country proportionately.

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Nevertheless, banks have uniform slabs across the country. 8220;Banks need to have categories because of the risk weightage assigned to the size of the home loan, as directed by RBI,8221; said Parekh. As per current guidelines, banks have to assign a 50 per cent risk weightage to home loans of up to Rs 20 lakh. If the loan amount crosses Rs 20 lakh, the risk weightage assigned by the bank rises to 150 per cent. This raises the bank8217;s cost of lending to borrowers purchasing higher-priced properties.

In the light of the changed market dynamics and the much higher property prices prevailing in metros and bigger cities, a revision of the home loan slabs may be necessitated. Two years ago, Rs 20 lakh would have been a respectable amount to buy a decent sized house, even in a large city. With the property boom, prices have risen steeply.

Asked about the need to revise priority sector slabs, a senior RBI official said: 8220;We always keep reviewing policies as per evolving situations.8221; In April 2007, RBI had reduced the risk weightage for home loans of up to Rs 20 lakh from 75 per cent to 50 per cent.