Bank lending routed through housing finance companies (HFCs) of up to Rs 20 lakh for home buyers will be treated as “priority sector advances”. This policy tweak by the Reserve Bank of India is expected to facilitate greater flow of funds for HFCs and bring down home loan rates.

As per present RBI norms, bulk loans from banks to HFCs are treated as priority sector lending provided the latter break the entire amount into individual loans of up to a maximum of Rs 5 lakh each.

For instance, if a bank lends Rs 10 crore to an HFC to meet its priority sector target, the HFC will have to find takers for housing loans of Rs 5 lakh each. The entire Rs 10 crore is then immediately classified as priority sector loan by the bank.

When the cap is raised to Rs 20 lakh, it will be at par with the existing cap on direct home loans by banks that are considered as priority sector lending. The relaxation is expected to result in higher flow of affordable housing loans at a time when the property market is going through a turbulent phase.

Scheduled commercial banks are required to set aside 40 per cent of the lending as loans to priority sectors such as agriculture and housing loans, as identified by the government.

Chairman and managing director, National Housing Bank (NHB), S Sridhar, confirmed to Financial Chronicle that the proposal to hike the cap has been taken up with the Reserve Bank of India. “We have taken up the issue with the RBI. It will be beneficial for the housing sector,” Sridhar said.

P K Jain, executive vice-president, PNB Housing Finance, said that a hike in the cap would result in greater flow of funds to HFCs. “A higher limit would mean that banks will give more funds to HFCs. It would also result into greater demand for housing finance,” Jain said.

The aggregate housing finance market of the country stands at around Rs 1,80,000 crore, of which 35-40 per cent is extended through HFCs that are regulated by NHB.

Though the move is expected to help builders to offload some of the inventory, developers appear to have adopted a wait-and-watch approach to the proposed plan. Says J C Sharma, managing director of Bangalore-based Sobha Developers, “This step will help increase the comfort factor and help buyers recalculate their repayment capacity.”

Says R Subba Raju, vice-president (finance), Nagarjuna Construction, “It’s not the loan amount, it is a matter of interest cost. That’s what makes up the major cost for the buyer.” Niranjan Hiranandani, managing director, Hiranandani Constructions, called it a step in the right direction, but added that it was not enough. “Banks are short of funds. They shy away from lending to any sector. The government should do more to increase liquidity in the banks,” he said.

Hemant Shah, chairman, Akruti Nirman, however, welcomed the move. “It is a good move. It will help boost demand in the lower-cost housing sector. But things will dramatically change only if the interest rates come down,” he added. Brigade Enterprise pointed out that that their client band is in a higher bracket than the proposed Rs 20 lakh limit. “I think this move would help the affordable sector more. Most of our clients draw a high loan amount. The average loan that we offer is in the Rs 30 lakh to Rs 40 lakh category,” Brigade managing director M R Jaishankar said.

A senior official of a housing finance company pointed out that a higher cap would make it easier for them to manage the funds. “This would be very significant for HFCs. A higher cap will make our life easier since we will be able to manage the fund better. In the present housing market, Rs 5 lakh is not adequate to purchase a decent house in many places. If we add the down payment required to purchase a house, a Rs 20 lakh loan could finance a house worth Rs 26-27 lakh,” the official said on condition of anonymity.

He explained that HFCs are often able to get these loans from banks at 125-150 basis points lower than their normal rate of lending. “Though HFCs are not mandated to pass on the discount to the eventual borrower, the home loan could be offered at lower rates because of the spread available to the HFC,” the officials said.

With contributions from Supriya Unni, Shilpa Shree and Abhishek Anand