CRR hike causing cash crunch in home loan segment
By Joseph Samson
Nov 26, 2007
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New Delhi: The recent move by the Reserve Bank of India (RBI) to increase the cash reserve ratio (CRR), by 50 basis points to have a control over the excess liquidity prevailing in the market, though has not yet affected the interest rates, but it is already started to affect the smaller players in the home loan segment.

RBI had decided to keep the other rates at the same level but increased the CRR, the banks and other major players in the home loan segment reacted cautiously to this step and fearing that even a small increase in the interest rates could make the already scarce borrowers, flee the market, they decided to keep the interest rates at the previous levels.

Bigger players were able to absorb the shock of the reduced liquidity, but the smaller players started to feel the pinch instantly. They had little option but to look for private equity and other institutional finance to fund their cash crunch. This has in effect put pressure on the lender margins and cost of funds. Experts agree on the fact that this tight availability of funds could cause an adjustment in home loan interest rates.

A slowdown in demand and the effect of this correction on property prices is not ruled out completely. Realty experts believe that there will be some slowdown in property sales and substantial drop in overheated and abnormally high real estate prices in some markets such as Gurgaon, Noida, Jaipur in north and Bangalore in south.

Before the CRR hike, banks had reduced interest rates and processing fees on home loans to lure in more customers during the festive season, they expected a decline in various lending rates by the RBI. However, experts were more or less unanimous about the increase in CRR. Any changes to the CRR are done to keep the money supply in control and it is a regulatory measure exercised by the RBI very often. Undoubtedly, this will make procuring funds difficult for some small borrowers, but the major players will keep the rates at current level, at least in the near future.

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