On April 7, 2008, The Indian Express had reported that given the sharp escalation in housing prices, especially in bigger cities, the limit of Rs 20 lakh for priority-sector lending needed to be raised. Banks and home finance companies said they would think twice before passing on the cost of a hike in cash reserve ratio (CRR) to borrowers. Some others said they would not hesitate to transfer the benefits to customers.

If we take the interest rates quoted by SBI, till now the interest rate for loans up to Rs 20 lakh for a tenure of 20 years stood at 10.5 per cent and those above Rs 20 lakh stood at 10.75. Since the benefit of lower risk weightage will now extend to loans up to Rs 30 lakh, a customer will save Rs 505 in his EMI for a loan of Rs 30 lakh at an interest rate of 10.5 per cent.

GE Money Wizard Housing Finance chief executive officer Egisto Franceschi said, “It will benefit more customers outside tier-I cities as property prices in big cities are much higher. Once we figure out the benefits to us, we will transfer these to our customers.”

The lower risk weightage reduces the cost of lending to banks, enabling them to pass on the benefits to customers. In metros, thanks to high property prices, only around 15-20 per cent of the total number of home loan disbursements fall in the Rs 20 lakh bracket. With the limit raised to Rs 30 lakh, this percentage will go up, and a significantly greater number of customers will be able to reap the benefits of lower loan rates.

Multinational real estate consulting firm CB Richard Ellis’ managing director Anshuman Magazine said, “It is a good move. But considering the way real estate valuations have gone up, I think the limit should have been raised to Rs 40 lakh to cover a larger number of beneficiaries.”

In a scenario where homebuyers are facing the double-edged sword of rising interest rates and increasing property prices, the move will offset the impact of higher interest rates (due to the hike in CRR to 8.25 per cent from 8 per cent), at least for priority-sector borrowers.