Finance Minister Pranab Mukherjee today announced an interest subsidy of 1 per cent for one year on housing loans of up to Rs 10 lakh for properties worth less than Rs 20 lakh, a move that has been widely welcomed by realtors and home loan companies. The measure is expected to cost the exchequer Rs 1,000 crore.
Mukherjee made these announcements in the Lok Sabha today as part of his reply to the discussion on the Finance Bill. Both houses of Parliament passed the Finance Bill 2009-10, which included a raft other concessions.
Assuming a monthly saving of Rs 60 per lakh, today’s announcement implies that a borrower saves about Rs 7,200 on a 15-year loan of Rs 10 lakh. The interest rate subvention will be routed through the scheduled commercial banks and the housing finance companies registered with the National Housing Bank.
| PRANAB'S PANACEAS (Other announcements in Parliament on Monday) |
| * Extension of tax breaks for industrial park schemes by two years till the end of March 2011 |
| * Poultry, real estate developers and food processing units to get tax breaks |
| * Tax sops on natural gas produced from coal seams |
| * Service tax on new services applicable from September 1, 2009 |
| * Road repair and maintenance services exempt from service tax |
| * Legal guardian of the student who has applied for an education to get tax break |
“The demand for affordable housing is picking up and the interest subvention of 1 per cent on home loans will make it easier for people to buy homes,” said Pradeep Jain, chairman, Parsvnath Developers.
Today’s announcements mark the second stimulus package for the slowing real estate sector, which has been hit by slowing demand and rising costs. Last December, the government had announced a concessional interest rate scheme for housing loans as part of the first fiscal stimulus package. The Indian Banks Association (IBA) had accordingly worked out an interest rate of 8.5 per cent for fresh home loans below Rs 5 lakh and 9.25 per cent for loans between Rs 5 lakh and 20 lakh. Now the rate for loans up to Rs 10 lakh will drop another percentage point.
According to the latest Reserve Bank of India data, outstanding home loans were estimated at Rs 2,75,514 crore as on May 22. On a year-on-year basis, the growth rate had slowed to 5 per cent at the end of the third week of May, 2009 against 13.8 per cent a year ago. During the same period, non-food credit growth had slow to 17.6 per cent from 24.2 per cent. Most home loans are in the sub-Rs 15 lakh segment and with prices declining more and more people are opting for sub-Rs 30 lakh loans.
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Describing the subsidy as a “positive development for small borrowers”, Union Bank of India Chairman and Managing Director M V Nair said, “It will boost demand for loans. There has been a price correction in the real estate market over the last six months and lending rates have also come down.”
Nair, who also heads the IBA, added that the move would act as a “catalyst for those who were sitting on fence”.
Renu Sud Karnad, Joint MD, HDFC, the country’s largest mortgage player, said the move would “result in increased activity in affordable real estate, which in turn will create employment”
“With real estate directly and indirectly supporting 269 industries, big and small, the move will have a positive impact on the economy,” she added.
R R Nair, director and chief executive officer, LIC Housing Finance, the country’s second-largest mortgage player, said the subsidy would help customers from rural and semi-urban areas because the ticket size of their loans is usually below Rs 10 lakh.
“It is generally the bigger cities that have loans of ticket sizes greater than Rs 30 lakh. Roughly 50-60 per cent of our loan book consists of loans below Rs 10 lakh and almost 99 per cent of our advances are below Rs 30 lakh. However, the repayment capacity of borrowers and quality of these assets will also have to be considered,” he said.
Nair suggested that it would help if the government gave lenders an assurance that it will make good their losses if a borrower defaults. “This will help take the scheme to its intended beneficiaries so that deserving people can avail of credit,” he added.