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March 28, 2000
The Rediff Business Special/Nikhil Faleiro
Housing sector breathes free as interest rates are pared
Relief mixed with joy enveloped thousands in the country as soon as the Housing Finance Development Corporation or HDFC lowered its interest rates by one percentage point on March 8, 2000.
For scores of individuals, the dream of owning their own house has remained a distant mirage for long. Paucity of funds and prohibitively expensive loans have made the situation gloomier.
Echoing a common refrain, Arvind Sharma, a 33-year-old technician working for the Bombay Port Trust, says, "For years, I dreamt about moving from my modest quarters to something more spacious. But I could not do it because I did not have the necessary capital. With the interest rates on housing loans being so high, I could not afford one either."
However, with India's Finance Minister Yashwant Sinha providing the impetus to the housing industry through a variety of incentives in his Budget 2000 proposals, the beleaguered industry seems poised for a revival.
"It's perestroika!" gushes Niranjan Hiranandani, chairman, Hiranandani Constructions. "The industry is on the brink of a revolution, for the government's new budget proposals will benefit a lot of people in the long run. During the licence raj (strict state controls), the politicians had a good time, but as we liberalise our economy further, the common man stands to benefit too. And this is what is happening to the housing industry: liberalisation."
With housing finance companies lowering their interest rates, many prospective buyers can now hope to make that elusive dream come true. The finance ministry has doubled commercial banks' lending for housing finance to 3 per cent of their incremental deposits, and the availability of funds for housing finance is now expected to increase by another Rs 60 billion.
Taking full advantage of the increase in equity, the Housing and Urban Development Corporation or HUDCO lowered its interest rates. It offered competitive rates to, both, individuals and families. By reducing the rates to 12 per cent on a loan of Rs 70,000, and 14.5 per cent on a loan of Rs 1 million, HUDCO aims to meet is target of providing 2 million houses by 2000-end.
"With more liquidity and lower interest rates, there will be an upsurge in construction volumes. The quality of houses too would become better," opines V Suresh, chairman, HUDCO.
Close on the heels of HUDCO cutting its interest rates, HDFC too announced the slashing of its rates to an 18-year low. This has spurred demand in a sluggish housing market.
Keki Mistry, executive director, HDFC, concurs. "Yes, there will definitely be an increase in applications. People who have been sitting on the fence will definitely come in and buy. The reason is that people see bigger benefits from these proposals. With the customer happy, the gloom in the industry will soon disappear."
HDFC now expects a significant increase in its disbursements to individuals in the coming months. Currently, individuals account for 69 per cent of its disbursements. The premier housing finance company has already earmarked an additional 25 per cent, or Rs 20 billion, of it funds for disbursements. However, if demand increases further, it is ready to match it with more funds.
HDFC has slashed its rates from 14.5 per cent to 13.25 per cent on loans from Rs 1 million to Rs 1.5 million, and from 13.5 per cent to 13.25 per cent on loans from Rs 10,000 to Rs 1 million.
The Life Insurance Corporation Housing or LIC Housing, too, reduced its interest rates on home loans by 25-175 basis points on loans of Rs 25,001 to Rs 5 million. The single slab of LIC Home Finance will have two sets of interest rates, depending on the term of the loan. The interest rate for a term of 15 years is 13.25 per cent and a 16-year loan is pegged at 14 per cent.
HDFC, LIC Housing and HUDCO -- the big players in the sector -- are not the only ones taking advantage of the incentives offered by the finance minister in Budget 2000. Relative newcomers such as Dewan Housing Finance Corporation or DHFC, ICICI Home Finance, and Maharishi Housing Finance Corporation, too, have lowered their rates.
DHFL pared its rates by 25-200 basis points from March 9 and will charge 12 per cent for loans up to Rs 25,000, 13.25 per cent for loans between Rs 25,001 and Rs 100,000 and 16 per cent for loans between Rs 1 million and Rs 2.5 million. To encourage customers further, DHFL has waived off prepayment charges in all the loan categories.
"Our aim is to pass on the benefits of low-cost funds to the maximum number of people," says Kapil Wadhwan, executive director, DHFL.
Maharishi Housing Development Finance Corporation has also revised its interest rates. The new rates are: 12.5 per cent for 25,000, 14.5 per cent for 25,001 to Rs 1 million, 15.5 per cent for loans above Rs 1 million to Rs 2.5 million. Funds are also available for purchase of a new dwelling and construction of new houses.
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