Infrastructure Status to Housing Sector – Is it the need of the hour?

The Indian Finance Ministry has recently asked the Central Bank of India, the Reserve Bank to consider giving infrastructure status to the housing sector. The ministry has also asked to relax the provisioning norms in the sector so that banks can attract the potential buyers, to lend loans at attractive interest rates. This will boost the economic development and thus help people to invest in the housing sector.

Banking Norms

Reserve Bank in response, has mandated that the banks need to set aside an amount equal to 1% of total standard assets in commercial real estate which includes housing projects. This would help to offset any loan to the sector turning bad. Finance ministry asked the apex bank to look into the possible measures which can be implemented so as to provide an impetus to the housing sector and thus help the sector grow. Having said this, it is a possibility that these measures taken by the finance ministry and the apex bank, towards the housing sector could lead to decrement in the price of the housing projects. As a result the Cost of Housing Projects may come down and thus the common man could easily afford getting his/her own house with the help of bank loans. Also a separate segment within commercial real estate (CRE), having low provisioning norms could be created which would help boost the development in the sector.

How will the Cost of Housing Projects Go Down

A reduction of 40-50 basis points in provisioning norms can free up more capital with banks for lending towards the housing sector which would provide a positive energy in the sector thus helping it grow at a much faster pace. Due to the reduction of basis points, chain reaction would lead to the cost of housing projects going down thus leading to lower prices in residential real estate. This measure will definitely provide an overall boost to the economy.

Non Executive Chairman of HDFC Group, Mr. Deepak Parekh said that the central bank of India should look at providing such dispensation”. According to Mr. Parekh, there is definitely a case for the issue and it’s high time for the government to think and frame policies which would help in lowering the cost of the housing projects so that the prices of real estate can go down. A case to the National Housing Bank has already been made so as to lower the provision norms on individual loans so that people can easily avail the credit facility.

Further it was reported that RBI has increased the provisioning for the sector from 0.4% for standard assets to 1% in October 2009 when the exposure rose sharply and risk of default was high. Concerns over asset quality compelled RBI to increase the provision so as to safeguard the interest of the stakeholders and prevent huge losses. This measure obviously resulted in a slowdown for the loan to commercial real estate which dropped to 7.8% in the year 2011-12, thus again compelling the government to relax the provision so as to roll back the measures implemented years ago.

Adding fuel to the fire, it was reported that the home sales across the country dropped over the past year, owing to the fact that the increase in prices of real estate was unrealistic in the recent years. Numerous tries by the finance ministry to impress upon the developers to reduce prices, so as to improve the sales failed, owing to the fact that the provision in the sector by the banks has been very high.

Conclusion

Due to the unavailability of liquidity in the sector, the price of the housing projects were not coming down, which forced ministry to discuss the provision norms with the Central bank so as to bring down the prices of projects and help the individuals. It can be said that this move will improve the sentiment and reduce the interest rates for the developers; and thus will help economy grow at a better rate than expected. This is a step in the right direction and would help people go for their dream home, which once became a distant dream for many.

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