Wednesday, November 3, 2010

Well Done Subba Sir !!!

( Writer is Senior Associate Producer in CNBC-Awaaz and IIMC alumnus) 
On 2nd of November 2010, when RBI announced a 25 basis point increase in repo rate and reverse repo rate, no one was surprised. And me too was not going to discuss about these benchmark rates. I will talk about Subbarao's visionary step which he took about the home loan market (and property market at large). What he is seeing, either no one is able to see it or doesn't want to take it seriously. If Subbarao had made it tougher for banks to continue with the 'Teaser Rate' home loans, it is not without any reason. It may be hard to believe but these loans are risky for banks as borrowers may default when interest rates surge and such condition may lead to a crisis like sub-prime crisis in western world.

RBI Governor D. Subbarao
Here I would point to a very complex situation, which is behind such a perception. Let's start from the Teaser Home Loan only. These loans are given by banks to home loan buyers to achieve their desired credit growth and to increase their buisenss. Remember that the major source of income of banks is the credit sales and no bank can sustain if it doesn't focus on credit growth. Also, the income on retail loans (of which home loan is the biggest chunk) consitutes a mentionable portion of their whole income. But since the property rates across the contry is running high, there is a big risk involved in home loan portfolio. As banks generally give loan upto the 90% of the value of property, the risk is maximised in such cases, because if the prices of property corrects even to 10-15% from current rates, the banks may find themselves on the wrong side of the fence. These days many high end property developers have come with their 90-10 offers, in which the customer has to pay only 10% of the original price and rest 90% would be paid by the bank as the loan. When RBI caps loans at 80% of the property value, it wants to check this dangerous trend.

Tough time for banks
RBI has also increased the provisioning 5 times on Teaser Home Loan due to which the rates on such loan are bound to go up. Obviously banks have been criticising RBI's move but I think in the long term this would be healthy for our banking system as well as property market. Here I must tell you that in many of  90-10 offers given by big developers, many projects have not even got necessary approval but the developers have started booking aggressively. And, if banks are going ga-ga over such projects, it indicates some fishy tie ups between banks and developers. There are high chances that only to achieve credit growth, the banks are undermining the high risk involoved. So, though the RBI's measure  may not correct property prices, but at least it will ensure the conditions like sub prime crisis far from us.

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