• Sat. Dec 2nd, 2023

Housing Finance Bank

Housing Finance Bank, The Real Thing

A clear K-shape is visible in the housing loans getting disbursed

For a period of a little over three years from June 2020—after covid had just broken out—to June 2023, core inflation was higher than 5%. Over the last three months, it has been lower than 5%. In September, core inflation was at 4.6%, the lowest it has been since March 2020, when it was at 3.8%. Core inflation is the inflation among the items that remain, after leaving out food, fuel and light items in the consumer price index. They form 54.1% of the overall index.

A possible explanation for the fall lies in the fact that the Reserve Bank of India (RBI) started raising the repo rate—the rate at which it lends to banks—in May 2022. Between then and now, the repo rate has gone up from 4% to 6.5%. This rise, among other things, has pushed up interest rates across the financial system.

The hope is that as interest rates go up, people and businesses cut down on their consumption, slowing down the growth in demand and the growth in wages, leading to lower inflation.

But this doesn’t happen overnight. The transmission of monetary policy of a central bank—in the form of higher interest rates slowing down consumption growth and discouraging corporates to borrow and expand—and that in turn helping control inflation, takes time. This time gap is referred to as the lag. Now, how long is the lag in the Indian case? Viral V. Acharya, while he was a deputy governor of RBI, had said in a November 2017 speech: “Monetary policy actions are felt… with a lag of 3-4 quarters on inflation.”

When RBI started raising the repo rate in May 2022, core inflation had stood at 6.2%. It continued to be above 6% until February 2023, except in July 2022 when it was at 5.95%. Since March 2023, it has been lower than 6%. Clearly, as Acharya had said, it has taken the monetary policy nearly three to four quarters to have an effect.

But one area where the higher interest rates haven’t seemed to have had an impact is in the disbursal of housing loans. From January to May 2022, before and around the time RBI started raising the repo rate, the growth in the outstanding housing loans of banks—which give out a bulk of these loans—had stood at around 13%. Post-May 2022, it has stood largely in the range of 14-16%. The increase in the months of July and August has been 37.4% and 37.7%, respectively. But this has been because of the merger of HDFC—which was a housing loan lender—with HDFC Bank. The data published by RBI on the lending done by banks by economic activity doesn’t adjust for this merger, forcing us to use June numbers.

The housing loan interest rates before May 2022 had stood at 6.5-7%. Now they are at around 8.4% to 10%, with housing loan equated monthly instalments (EMIs) having jumped 20%. But this hasn’t slowed down their disbursal. Why? The answer lies in looking at the breakdown of housing loans between priority sector loans and the non-priority loans. Priority sector housing loans are defined as: “Loans to individuals up to 35 lakh in metropolitan centres (with a population of 10 lakh and above) and up to 25 lakh in other centres… provided the overall cost of the dwelling unit in the metropolitan centre and at other centres does not exceed 45 lakh and 30 lakh, respectively.” The remaining loans are non-priority loans.

In the months leading up to May 2022, priority sector housing loans formed around 35-36% of the overall outstanding housing loans of banks. By June 2023, they had fallen to 31.5%, implying that banks are giving out more non-priority housing loans. Of course, these loans are largely taken on by the well-to-do, who do not get impacted much by the rise in EMIs.

In fact, the outstanding priority sector housing loans of banks from January to June have been just 1-2% higher than during the same months in 2022. When it comes to non-priority housing loans of banks, they have been around 22% higher from January to June in comparison to the same months in 2022.

Further, the percentages don’t explain this inequality well enough. The outstanding priority sector housing loans from June 2022 to June 2023 went up by 137.76 billion. In comparison, the non-priority sector housing loans went up by 2.47 trillion, nearly 17 times more. To be fair, this anomaly existed even before the Reserve Bank started raising rates, but it has only got worse, primarily because real estate in the formal sector continues to remain very expensive and the fact that prices of high-end real estate have rallied in the last 12-18 months.

Of course, actions of central banks have consequences. Things don’t always work in just one direction. The trouble is that the other direction rarely gets talked about. When RBI and almost every other central bank pushed rates down post-covid, it led to massive bubbles in stocks and cryptos and higher inflation. But there was very little talk about these bubbles in the communications of central banks. Now, as RBI has raised rates, the not-so-well-to-do have been pushed out even further from the housing markets, and there is very little talk about this K-shaped impact. Like the part does not always reflect the whole, the whole also rarely reflects all the parts.


By admin

Leave a Reply

Your email address will not be published. Required fields are marked *