Banks and housing finance companies are feeling the effect of the downward spiral in business sentiment triggered by the demonetisation of high-value currency notes.

Market expectations of a decline in real estate prices as well as in interest rates have prompted borrowers to defer purchases, resulting in tepid home loan demand.

A top housing finance company executive said, “Retail home loan enquiries have come down substantially... it is almost next to nothing. Even people who made token payments on purchases are holding back and not taking fresh loan disbursements. In some cases, we have seen cancellations of bookings too.”

A senior public sector bank official said prospective home buyers had gone into a wait-and-watch mode to figure out how property prices will move.

Underscoring the slowdown in demand, the head of one of Central Bank of India’s large branches in Mumbai said that on an average, his branch used to receive 15-20 home loan proposals every month.

But over the past month, it had received only two or three proposals.

Given that the cash crunch induced by the demonetisation shows no signs of abating even a month later, the housing finance company executive felt that normalcy — in terms of people getting back into the loan market and builders starting to move forward — could take up to six months.

The heightened governmental focus on draining out black money transactions has raised expectations among prospective buyers of a fall in real estate prices. Further, banks are awash in liquidity from the deposit inflows in the wake of demonetisation, and the Reserve Bank of India has signalled an accommodative monetary policy stance, which could see interest rates soften.

In the backdrop of lacklustre corporate credit growth and rising distress in corporate loans, banks have over the past year or so been relying on home loans to grow their loan book. In the case of housing finance companies, home loans are their bread and butter.

Overall, over the past three or four years, banks and housing finance companies have seen a 20 per cent year-on-year growth in home loans.

But now, with home buyers putting purchase decisions on hold, and the third and fourth quarters unlikely to see much home loan uptake, the earlier pace of loan growth could come off a bit, noted the housing finance company executive.

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