The past decade had been eventful for the real estate and home loan segments. With significant improvement in disposable income and falling interest rates there was a profound increase in real estate investment. Home loan disbursals increased significantly in banks and housing finance institutions. During 2017-18, HFIs disbursed ₹2.24 lakh crore out of which 66% was for acquisition of constructed houses and construction of new houses; loan amount of above ₹25 lakh per individual borrower saw increased traction.
There have been progressive changes in management of monetary policy transmission at the government level. The frequency of announcing monetary policy was made bi-monthly that enabled the Reserve Bank of India to monitor the liquidity, money supply, inflation and repo rates on more frequent basis. The government also set an inflation management target for the RBI, to strictly maintain the levels at not below 2% and not above 4%.
In September 2016, the RBI’s autonomy in monetary policy decisions was taken away by introducing a Monetary Policy Committee. It comprises six members; three government-appointed (external to RBI) and three from the RBI including the Governor who would deliberate on key policy decisions including setting the repo rates.
In the last 10 years the repo rate oscillated between 5% and 9% that mirrored the challenges the economy faced; in December 2019 it was 5.15%. Reflecting the volatility in repo rate, which is largely considered as the benchmark for fixed deposits and lending rates, the home loan rates too fluctuated.
The RBI and banks dabbled with the method of fixing home loan rates; two methods made headlines. First it was MCLR (marginal cost of funds-based lending rate) method that RBI introduced in 2016.
The MCLR method was replaced in 2019 by repo linked lending rate (RLLR). The home loan lending rates were linked to the RBI’s repo rate. This method was considered to be less complicated and importantly benefited home loan borrowers. Every time RBI changes the repo rate the lending rates too would change; this, of course, would be beneficial to borrowers during falling interest rate scenario and be detrimental in rising interest rate scenario.
The biggest annoyance for the RBI was that banks and financial institutions were not effectively passing on the rate cut benefit to home loan borrowers whenever the cuts were announced. The RBI Governor urged lenders to fully pass on the benefit to the borrowers, which most of the time received a tepid response.
The surge in economic development also witnessed the mushrooming of builders and developers, a few of them duping unsuspecting buyers by not completing the projects and/or mismanaging the funds. As an antidote, the much delayed Real Estate Bill was approved by the government and RERA was officially introduced; the real estate segment went from being an unorganised to an organised segment with this Bill.
The government during 2017 also announced its ambitious Pradhan Mantri Awas Yojana that aimed at building over four crore houses in five years under the affordable housing project.