RBI targets economic stimulation through housing

The Reserve Bank of India on Friday announced measures to bring home loan interest rates which at the moment are the lowest in 30 years, one step lower.

Even though the Repo rates have not been changed still one can expect the interest on housing loans to come down further. One of the major criteria followed by banks and other financial institutions while granting housing loans is the ratio between the housing loan and the value of house or Loan to Value (LTV). For example if a Rs 40 lakh loan is given for a house which has a value of Rs 50 lakh, the LTV will be calculated as 80 per cent.

Even if the LTV is less than 80 per cent, then the banks can have lower capital outlay for such loans. If the LTV is between 80 percent and 90 percent then the capital outlay will have to be increased a little. Until yesterday the proposal was related to the loan rate. Up to 30 lakh one rate and above that amount another rate. In short the interest rates for big houses will now come down further.

It is estimated that when a house is constructed about 350 materials are sold including cement, iron, steel, wood, electrical fittings etc. Therefore it is a good decision to make housing loans more attractive as it could help in overcoming the recession.

In view of elevated consumer price index, plummeting economic growth rate - stagflation (the phenomenon of inflation and recession happening together) happen together) affecting our economy, stimulating the housing construction sector is one of the ways to overcome this phenomenon.

The second important decision of RBI is to give Rs one lakh crore On Top fund to the banks for investing in the bonds in certain sectors of economy. This will benefit non banking financial institutions which are headquartered in Kerala. The banks can utilise this fund to invest in sectors including financial institutions.

The RFBI will make this fund available till March 31, 2021. Funding will be in line with the repo rate of 4%. And below market rates.

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