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Former Reserve Bank of India (RBI) governor Duvurri Subbarao’s parting shot – red flagging of 20-80 schemes – was one among his several moves that put pressure on the real estate sector.
Former Reserve Bank of India (RBI) governor, Duvurri Subbarao’s parting shot – red flagging of 20-80 schemes – was one among his several moves that put pressure on the real estate sector.
The most famous one – stopping the teaser loans of the State Bank of India. When RBI asked SBI to stop teaser loan products in a couple of years, there were criticisms that buyers would be hurt. But the way interest rates have risen/stayed high and may continue to be high for some more time, a teaser product at 8% - 8.5% for the first two-three years would have been suicidal for buyers.
RBI, under his regime, took several steps to ensure that home buyers did not go overboard. For example, banks and housing finance companies (HFCs) were asked not to pay registration and stamp duty fees as a part of the home loan. These duties contributed as much as 5-8% of the property price. In addition, the loan-to-value of home loans was capped to 80%.
Many banks and HFCs, earlier, were quite liberal about this number. Some ended up paying more than 100% of the property price (after including stamp duty and registration). They would even offer a home improvement loan, along with the home loan. By stopping all that, RBI tried to reduce the leverage of buyers.
Several other measures, proposed by the Damodaran Committee, were implemented. The most important one was the banning of the pre-payment penalty for floating rate loans. This helped buyers who wanted to switch to a cheaper rate to another bank. The biggest beneficiary of this, according to industry players, was SBI which played on its ‘lowest-rate’ card well.
His last move, cautioning banks about 20:80 scheme, comes at a very good time. With the passage of the Land Acquisition Bill, builders are already upset about how the price of land will rise by a good three to four times. Since the cost of land is almost 30-50% of the total cost of property, this could lead to further rise in prices.
By asking banks not to fund such projects and cautioning buyers about the credit rating if the builder fails, RBI is clearly giving a signal that builders need to bring in their own money to buy land. Once the project takes off, they can sell it to buyers to raise money for construction purposes.
Bankers said that in this way, RBI is trying to ensure that there is no deviation from Subbarao’s predecessor Y V Reddy’s diktat that banks cannot fund land purchases. Also, it is likely to force builders to complete existing projects and sell them before moving on to the next one. There are already talks that this move could lead to fall in real estate prices.
Of course, the performance of Reserve Bank of India governors are normally weighed by ‘inflation containment’ and ‘growth support’ through their interest rate or liquidity regime.
No wonder, in his last speech D Subbarao chose to respond to Finance Minister P Chidambaram’s famous statement last year – "if the government has to walk alone to face the challenge of growth then, 'we will walk alone' with... "I do hope Finance Minister Chidambaram will one day say: “I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.” Only time will tell whether Subbarao’s obsession with inflation was correct or not.
But he scores heavily when it comes to making life difficult for the real estate sector. Like a banker says: “If he had told banks not to allow builders to rollover loans three-four years back, prices would have corrected sharply by now and buying activity would have started aggressively.”
Over to Raghuram Rajan...
