Interest rate reduction doesnt really excite consumers

A reduction in the interest rate announced recently by a few housing finance companies and banks and the possibility of others also following suit, with the festival season round the corner, could not be better timed. The slashing of the rates comes at a time when the real estate is going through a sluggish patch in the backdrop of the sharply rising land prices making middle class households increasingly feel that there is little for them to purchase. While representatives of the realty sector are happy about the reduction, as they feel that the move would revive customers’ interest, existing customers of most of the HFCs and banks who opted for floating interest rates feel that they are being discriminated against. This is because the reduction in the rates is only for new customers, in other words those who will seeking loans afresh. What this means to the existing customers is little respite from the rather sharp increase in the rates on their home loans in the last two to three years. Their demand for also being extended the benefit of the recent reduction is not without reason as many of them have seen the interest rates spiral from 8 to 10 per cent or even more. It meant either an increase in the EMI (Equated Monthly Installment) amount or the repayment tenure. Upward movement Sources in HFCs said most of the institutions were in the practice of revising the floating rate every quarter though for some quarters the movement has been only upwardly. While pointing out that the reduction could well mean the beginning of the end of the alarming phase with regard to the spiralling rates, an official of LIC Housing Finance Limited said the reduction is translating into more customers. As regards the decision of the institutions to apply the reduction to only new customers, the sources reasoned that it was not easy for the companies and the banks to do since they had borrowed their funds at different rates and at frequent intervals. It would happen only when the cost of funds for the institutions come down. In addition, they also inform that whenever reduction is announced it only means that the banks are only offering a discount on the floating reference rate (FRR) and the FRR itself is not cut. Hailing the new interest rates, N.Sairam of G.R.Natarajan and Co said the existing customers should also be extended the benefit. The new rates, he said, was one of the few heartening aspects for the builders in the backdrop of the rising cost of raw materials and escalating land prices. Attractive The need of the hour, according to Mr. Sairam, is an interest rate regime which is attractive to the middle class and affordable housing. The focus should be on making more people own dwelling units rather than catering to the high end of the society. M.K.Sundaram, managing director, Chozha Foundation, said the rates for new customers were not surprising given that the rising interest rates for the banks also meant many households putting on hold their decision to purchase. He said some of the institutions, particularly those based elsewhere in the country, were offering special rates to the customers of certain builders and developers. Mr. Sundaram said one of the scheduled banks recently approached him promising that it would offer home loans at competitive rates to his customers. This was a welcome initiative, he said, even while highlighting the need for the HFCs to give some respite to the existing customers on floating rate as well.