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Banks will now be able to fund long-term infrastructure projects and affordable housing by raising bonds at a lower cost, thanks to the latest RBI guidelines. Does that mean home loan borrowers and infrastructure companies will be able to borrow at cheaper rates? Not quite so.
While the guidelines issued by the RBI will lend the necessary impetus to boost lending to the ailing infrastructure sector, it is unlikely to have a substantial impact on the cost of borrowings of infrastructure companies in the near term.
“The move definitely sets out a clear roadmap, and eases the structural constraints on the assets side for banks which were there earlier. The longer loan repayment, for instance, will help ease the cash flows of infra companies. But it will not have a substantial impact on the cost of borrowings,” says SS Mundra, Chairman and Managing Director, Bank of Baroda.
The benefit that will accrue to banks will be the least in the current year, and will gradually increase towards 2020.
But many are concerned of the attractiveness of such bonds. “Given the market for such unsecured bonds in our country, the marginal 10-15 basis points impact is not significant enough to pass on. And even if there is better acceptance of such bonds over the long run, other factors which are at play now will have to be weighed to ascertain the actual impact,” says Mundra.
Waiting period Even home loan borrowers will have to wait for long before they derive some benefit from the move. Banks today set loan rates based on the base rate. Base rates are a function of a bank’s cost of funds, which are dependent on the prevalent deposit rates and the direction of policy rates.
Unless there is a substantial reduction in any of these, there cannot be a meaningful reduction in home loan rates.
“Home loan rates will not come down in a hurry as they are linked to the base rate of banks. The benefit to a home loan borrower will only be over the long run. It is more a positive impact for developers,” says Soumya Kanti Ghosh, Chief Economic Adviser, SBI.
Builders and developers who have found it increasingly difficult to access funding will be able to source cheaper funds for development of affordable housing. Builders who are usually charged a higher interest rate may see some relief from this move.
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