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'Further rate rise will hurt'

BS Corporate Bureau in New Delhi | December 04, 2004 12:53 IST

Deepak Parekh, the chairman of HDFC, on Friday warned that any further rise in rates will put pressure on the interest to income ratio of home loan customers as well as the non-performing assets of banks.

"The interest-income ratio is already very high at about 50 per cent of the salary of the customer. With further increase, there will be immense pressure on customers for re-payment of loan. The central bank must work out ways to amend the repayment norms to reduce the interest-income ratio," Parekh said at the international real estate summit organised by the Federation of the Indian Chambers of Commerce and Industry.

"At present, the half per cent rate hike will not have a major impact but the existing floating rate interest loan borrowers will be hugely impacted if there is a 2-3 per cent increase in rates. The average re-payment tenure with interest could go by 10-15 years depending on the loan amount. And, the interest to income ratio may also go up," Parekh said.

ICICI Bank has already raised interest rate on loans by 0.50-0.75 per cent while HDFC has increased rates of floating rates by 50 basis points.

LIC Housing Finance and foreign banks like Citibank have also indicated hike in interest rates by 25-50 basis points after evaluating the trend.

Parekh further warned against the boom in the retail market. "There are talks of setting up 280 malls on 32 million sq ft area in India. And, if these materialise, 70 per cent of them will be a failure. The bankers as well as developers should be cautious and the banks must put a check on loans to the retail sector," Parekh said.

He added that there is a serious need of foreign investment in the real estate sector. "The clause of 100 per cent investment in the real estate market is not practical. Such huge space is not available in urban areas. There is severe need of finance not just from loans but also foreign investors and no foreign player would take up 100-acre space in rural area. So the laws should be changed," he said.

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