The housing sector is looking to get into overdrive in recent times and why not? The Government has after all eased out things in the real estate sector with PMAY sops, budget incentives and lower GST rates. Higher demand for residential real estate and lower rates of interest overall have combined towards growth in home loan books for several banks and NBFCs alike.
The RBI (Reserve Bank of India) has now come out with another move to galvanize the sector. It has instructed small finance banks or SFBs and RRBs or Regional Rural Banks to scale up home loan limits for eligibility under the PSL (priority sector lending) framework. This has been done for several purposes including the provision of offering a more similar playing field for these banks as compared to other SCBs or Scheduled Commercial Banks.
Key aspects of the decision by the RBI
The Reserve Bank of India (RBI) has been credited with introducing several game-changing measures for the financial sector in recent times. Here are some major components of its latest decision:
- PSL (priority sector lending) classification limits have been hiked by the RBI.
- Now, home loans given to individuals by small finance banks and regional rural banks up to Rs. 25 lakhs and Rs. 35 lakhs in other centres and metropolitan centres (those with a population of 10 lakh people and more) will be eligible for PSL classification.
- However, the eligibility increase will only apply in case the total cost of the housing unit does not cross Rs. 30 lakhs and Rs. 45 lakhs in case of other centres and metropolitan centres respectively.
- Till now, PSL (priority sector lending) classification was only provided for loans up to Rs. 20 lakhs sanctioned by Regional Rural Banks for construction/purchase of a housing unit per family and the overall cost of the unit was capped at Rs. 25 lakhs.
- This classification for small finance banks was sanctioning of loans up to Rs. 28 lakhs for individuals in metropolitan centres and Rs. 20 lakhs for other centres. The total cost of the housing unit was capped at Rs. 35 lakhs and Rs. 25 lakhs for metropolitan centres and other centres respectively.
- The RBI (Reserve Bank of India) has also issued a note where it is clearly stated that current income limit for families of up to Rs. 2 lakh annually in case of EWS (Economically Weaker Sections) and LIG (Lower Income Groups) categories has been increased to Rs. 3 lakh annually and Rs. 6 lakh annually for EWS and LIG categories respectively. This limit has been hiked in the master directive RRBs and also the SFB compendium and applies for construction of homes.
- This new decision is more in sync with the Pradhan Mantri Awas Yojana’s criteria for annual household income.
The RBI wishes to offer a level foothold to these RRBs and SFBs alongside other SCBs in the country with these decisions as per reports. The RBI has thus extended the housing loan eligibility criteria under the PSL framework for these two types of banks. The RBI has already stated that loan limits were revised in June last year for SCBs which does not include SFBs and RRBs and hence the same regulations will now cover them accordingly.
The SFBs and RRBs now have to tackle their book of outstanding home loans in a bid to adhere to the revised criteria for housing loans being classified under the PSL (priority sector lending) framework from the circular issue date. The other terms and conditions that were notified under the Compendium/Master Direction will be the same minus any changes according to reports.
Further bonanza in store for prospective homebuyers?
The Reserve Bank of India is likely to continue being the modern day hero for prospective homebuyers as per recent reports. After the increase in the eligibility for priority sector lending classification across regional rural banks and small finance banks, the RBI may be planning yet another cut in rates. The repo rate has already been lowered two times by the apex bank in succession which may lead to interest rates getting cheaper on home loans in the near future.
As per the latest reports, the RBI may be planning a cut in rates of interest for another time in June 2019 prior to the increase in fiscal deficit and also the growing pressure of inflation. These two factors will then render any further rate cuts highly unlikely as per experts. The repo rate was reduced by 25 basis points in the months of April and February 2019 in order to propel faster growth of the economy. The RBI is expected to adopt a tighter approach towards its monetary policy from early 2020 onwards and this may continue till the second half of the year as per reports.
Global and domestic growth could be on the slower side and inflation will be lower than the target of the RBI in India as per expectations. As a result, another cut in the repo rate seems to be on the cards for June 2019. There will be no cuts in rates after this as per several experts and a more stringent stance may be expected all throughout 2020 as a result. Growth in the first half of FY2019-20 will be driven by the easing out of the monetary policy by the RBI along with less stringent lending regulations and higher fiscal spending spurred by the elections in the first quarter. Of course, a cut in rates will mean welcome news for potential homebuyers who naturally relish the prospect of paying lesser interest on their home loans. It remains to be seen whether this move is implemented by the apex bank although it seems extremely likely according to several experts.