Now getting back to the topic at hand. Earlier this week, the Reserve Bank of India led by governor Raghuram Rajan, presented the third monetary policy statement for this year. The RBI decided to maintain the repo rate at the current level of 7.25%. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark for the interest rates that banks pay for their deposits and in turn charge on their loans.
As is the case always whenever the RBI does not cut the repo rate, there were immediate calls from real estate companies, lobbies and others associated with the sector (or what I call the real estate wallahs) that the RBI should start cutting the repo rate in order to get the sector going again.
Manoj Gaur, president, CREDAI NCR, a real estate lobby told The Economic Times that he hopes that the RBI would cut the repo rate in the time to come. Pradeep Jain, chairman of Parsvnath Developers also told The Economic Times that reduction in the repo rate “will be key to revive sentiment in the real estate sector”. There is nothing surprising here given that the real estate wallahs have been doing this for a while now.
In the monetary policy statement, the RBI said: “Since the first rate cut in January, the median base lending rates of banks has fallen by around 30 basis points, a fraction of the 75 basis points in rate cut so far.”
What this means is that even though the RBI has cut the repo rate by 75 basis points (one basis point is one hundredth of a percentage), the banks have cut the interest rates at which they lend only by around 30 basis points on an average. Hence, home loan interest rates haven’t fallen by as much as the repo rate has.
The real estate wallahs caught on to this point as well. David Walker, managing director of SARE Homes told The Economic Times: “We urge the banks who have only cut rates by about 30 basis points to pass on the full benefit of the 75 basis points cut in rates by the RBI.”
All these quotes essentially give the impression that the RBI is responsible for the crisis in the real estate sector in India and all will be well once the home loan rates come down. Nothing can be more untrue.
Let’s do some basic maths and see. The RBI puts out the sectoral deployment of credit data every month. As per this data as on June 26, 2015, the total amount of home loans given by scheduled commercial banks stood at Rs 6,53,400 crore. Home loans have grown by a very good 15.6% over the last one year. This when the overall lending growth of banks stood at a much slower 7.3%.
How were things last year? As on June 27, 2014, the total amount of home loans given by banks had stood at Rs 5,65,000 crore. Home loans had grown by 17.1%. The overall lending by banks had grown by 12.8%, during the course of one year ending on June 27, 2014.
Between June 2014 and June 2015, overall lending growth of banks over a one year period, has crashed from 12.8% to 7.3%, a fall of 550 basis points. In comparison, home loan growth has fallen from 17.1% to 15.6%, fall of a much lower 150 basis points.
Let me throw in some more numbers. In the last one year, banks gave out home loans worth Rs 88,400 crore. This formed nearly 21% of the total loans given out by banks. Hence, for every Rs 100 worth of loans given out by banks, Rs 21 went towards home loans. This is much more than in the past.
How was the situation in June 2014? In a period of one year ending June 27, 2014, the total amount of home loans given out by banks stood at Rs 82,570 crore. This formed 12.7% of the total amount of loans given by banks. This number as on June 28, 2013, had stood at 12.2%.
What this clearly shows us is that there has been no slowdown on banks giving out home loans, despite interest rates continuing to remain high (in the words of the real estate wallahs). In fact, banks have lent more home loans as a proportion of their total loans in the last one year, than they did in the two years before that. So, home loan lending has no clear link with interest rates as the real estate wallahs would like us to believe.
The question is even though home loans are being given why has there been a fall in demand for homes, leading to builders ending up with a massive amount of unsold inventories. One explanation may lie in the fact that even though the total amount of home loans being given out has gone up at a steady pace, the total number of home loans being given out may be declining. This maybe happening primarily because of the massive increase in home prices over the last few years. And this massive increase has essentially ensured that even though the total amount of home loans has been going up, the total number of home loans may not be growing at the same pace. The RBI does not put out data regarding the total number of home loans.
The RBI sectoral deployment of credit data gives us some hint on this front. The home loan data can be divided into priority sector lending (essentially loans of up to Rs 25 lakh are categorised as priority sector) and non-priority sector lending.
The priority sector home loan lending has grown by just 3.8% during the last one year. On the other hand the non-priority sector home loan lending has grown by a massive 30%. The same numbers as of the end of June 2014 had stood at 7.9% and 30.7%.
Also, as on June 26, 2015, the priority sector home loans of upto Rs 25 lakh given over a one year period formed around 49.1% of total home loans. As on June 28, 2013, to years earlier, the priority sector home loans given over a one year period had formed nearly 59.4% of the total loans. As on June 29, 2012, the priority sector home loans given over a one year period had formed nearly 62.5% of total home loans.
What this tells us very clearly is that priority sector home loans (i.e. loans of Rs 25 lakh or lower) have been falling. And the only possible explanation for this is an increase in home prices.
To conclude, that is where the problem is. The real estate sector cannot be revived by cutting interest rates. It can only be revived by builders cutting prices. Further, a cut in prices will also get the black money wallahs looking for a good deal back into the market. The ball is in the builders’ court. There is nothing that the RBI can do about it.
Postscript: I will be taking a break from writing The Daily Reckoning next week. I will be back after the independence day.
(The column originally appeared on The Daily Reckoning on Aug 7, 2015)