In a bid to ease capital constraints, the Reserve Bank of India (RBI) issued instructions for long-term bonds for infrastructure financing yesterday evening. These long-term bonds are typically issued by banks for infra debt. According to the RBI circular, the central bank intends to ease raising long-term funds by banks for infrastructure. There will also be infrastructure status for affordable housing projects.
Commenting on the new RBI guidelines, Neeraj Bansal, partner and head of Real Estate and Construction, KPMG said, "The step taken by Reserve Bank of India (RBI) is a positive step towards improving liquidity and reducing cost of funds for infrastructure sector. The inclusion of housing sector in this provision is a positive initiative by RBI and would help stimulate demand for housing in the country. This step is expected to reduce cost of funds to infrastructure sector by 100-200 bps as banks would no longer need to meet regulatory requirements of maintaining require cash reserve ratio (CRR), statutory reserve ratio (SLR) and priority sector lending (PSL) on funds raised for infrastructure and housing sector.
Currently, housing loans below Rs 2 million have lower interest rates as they fall into priority sector lending. With this step, loans up to Rs 5 million in 6 metropolitan cities (housing costing up to Rs 6.5 lakh) and Rs 4 million in other cities (housing costing up to Rs 5 million) - a major chunk of housing demand - are set to get cheaper. It is expected that this step would improve liquidity and make houses affordable, since 1% reduction in housing loan interest rates could reduce Equated Monthly Installment (EMI) of a home loan borrower by 8-10%. This step coupled with recent income-tax incentives provided in budget 2014-15 would help an boost savings of an individual up to Rs 1 lakh annually.
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