Following up on the government's fiscal policy package announced a few days ago, public sector banks came up with their contribution earlier this week in the form of lower interest rates for small housing loans.
Borrowers up to Rs 5 lakh (Rs 500,000) will now be charged 8.5 per cent per year, while those taking between Rs 5 lakh and Rs 20 lakh (Rs 2 million) will pay a slightly higher rate of 9.25 per cent.
These rates will come with a lock-in period of five years, after which the borrowers will have the choice of shifting to either fixed or floating rates prevailing then.
Of course, these rates are not available to existing borrowers looking to refinance their loans at better terms, since the whole objective of the exercise is to stimulate new demand for housing, which will then provide a boost to the construction sector and, through its multiple linkages, to the broader economy.
These measures bring the effective cost of borrowing down by about 2.5-3 percentage points for eligible borrowers.
Two broad questions arise. The first is whether it is a good idea to force-feed credit in this fashion to one corner of the market, with mandated interest rates that were supposed to have been tossed out a long time ago.
Indeed, bankers have raised questions about how they are supposed to meet costs, because lending at the prescribed rates will mean that they incur a loss.
If one were to set aside these objections, citing the abnormal circumstances of the day, the second question crops up: is this enough to be a significant inducement to home buyers?
The answer must be that, in an environment of rising uncertainty about jobs being retained, there is room for doubt about whether these concessions will do the trick.
The initiative must be evaluated in terms of whether it addresses multiple factors contributing to the sluggishness in the real estate market. Going by price patterns even
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