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Words of Wisdom : "Try to be a rainbow in someone's cloud." ~ Maya Angelou

Early Diwali for new home loan borrowers

Its going to be early Diwali for people looking to have their "own" roof over their head. Living in one's own dream house is undeniably one of the most cherished feelings. And Modi Govt. is working towards making this dream come true for the millions of aam aadmis, aurats and their bachhe.

Pursuant to the announcement made by the Finance Minister to encourage affordable housing, RBI has notified certain measures that would enable banks to reduce the interest rates on home loans, particularly in the small / mid-category.

As you would be aware, as a measure of financial prudence, banks are supposed to keep aside a certain percentage of the deposits that they raise [called the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)]. And only the balance portion can be lent for commercial purposes. 

So, while they have to pay market rates on the entire deposit amount, they can earn market returns only the remaining part. Therefore, to be a profitable venture, a wider gap has to be maintained between the deposit and the lending rates.

As per RBI, henceforth banks would be exempt from maintaining the CRR and SLR on the money that they raise to lend to the affordable housing section.

As per the notification "lending to affordable housing is defined as housing loans eligible under priority sector lending by the RBI and also housing loans to individuals upto Rs. 50 lakhs for houses of values upto Rs. 65 lakhs located in the six metropolitan centres viz. Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad and Rs. 40 lakhs for houses of values upto Rs. 50 lakhs in other centres for purchase/construction of dwelling unit per family."

In addition, this money will also be exempt from meeting the priority lending targets which comprise loans to the economically weaker segment.

As is evident, on account of the above relaxation, banks would be able to price their new home loans lower than the normal lending. This is great news for new borrowers, especially in the small and medium category for whom every percentage matters.

Further, banks are permitted to raise long term money with a minimum maturity of seven years for the same and hence reduce the timing mismatch between the deposits taken and loans given. This would help the banks to manage their funds in a better manner.

So I guess its time to start hunting for your dream home... cheaper loans are coming...  

Notes:
1. CRR is the amount that the banks have to keep with the RBI and normally ranges between 3-6%. It earns no interest.
2. SLR is the amount that the banks have to maintain in the form of gold, cash or primarily Govt. securities and normally ranges between 22-25%. This amount earns comparatively much lower returns.


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