The downward trend in interest rates since 2001 onwards following the global collapse post-9/11 and the resultant liquidity explosion that took place the world over, India included, helped widen this financial, asset-backed democracy here. Suddenly, aspirations moved from being mere dreams to becoming real houses. This saw big credit numbers rise — home loans, in particular, raced ahead at 40 per cent per annum, as companies ranging from private majors like HDFC and ICICI Bank to government-owned giants like State Bank of India simultaneously drove and benefited from lending to anyone who had an income and wanted to borrow. The poor voting mass at the lower end of the economic pyramid included.

By converting a big number like Rs 5 lakh into smaller slices of Rs 4,000 per month, equated monthly installments (EMI) became a new weapon of mass asset creation. It allowed drivers, electricians, plumbers to work in cities and finance their houses in their villages back home. The traders, clerks, back office professionals who employed them were able to buy Rs 15-20 lakh houses, paying Rs 12,000 per month. Let’s leave the growing mass of upper middle class households or the seriously wealthy alone, for politically they’re invisible.

Just as the wealth effects of homeownership were trickling in, the reversal in interest rates since February 2006 has turned this tide in more ways than one. So steeply and so high have interest rates climbed that banks don’t have the option of increasing tenures any more. If an aam aadmi had borrowed Rs 5 lakh to buy a plot of land in his village at 7.5 per cent in 2005, he would have paid an EMI of Rs 4,000 for 20 years. At 9 per cent, the EMI would have stayed put, but his tenure would have risen to over 27 years. From this point, however, the impact would be crushing — at 10 per cent, the tenure would be more than 70 years. Which means, this 35-year-old man would be all of 105 when he paid the last installment, something that’s statistically unlikely. At 11 per cent, he would pay till perpetuity.

... contd.