Bangalore Real Estate Trends

Increase in limit to qualify as priority sector loan is good for borrowers Ashish Gupta elaborates

Amidst the not-so-good news of interest rate increases by banks, there is some good news for the housing sector. The Reserve Bank of India (RBI) has raised the housing loan limit to up to Rs 25 lakhs against the existing Rs 20 lakhs to be eligible for classification as priority sector lending. According to the RBI, pursuant to the announcement made by the Finance Minister in Budget 2011-12, it has decided to increase the limit from Rs 20 lakhs to Rs 25 lakhs.

In his budget speech for the year 2011-12, the Finance Minister had said that on account of increases in prices of residential properties in urban areas, it was proposed to enhance the existing housing loan limit from Rs 20 lakhs to Rs 25 lakhs for dwelling units under priority sector lending. This change in categorisation will be applicable to housing loans sanctioned on or after April 1, 2011. Loans up to Rs. 25 lakhs irrespective of location to individuals for the purchase or construction of a dwelling unit per family, excluding loans granted by banks to their own employees, are eligible for classification under priority sector.

It also covers loans granted to housing finance companies (HFCs), approved by the National Housing Bank, towards refinance or to individuals for the purchase or construction of a dwelling unit, provided the loan does not exceed Rs 25 lakhs per dwelling unit per family.

Earlier the RBI had in July 1, 2010 increased the limit to Rs 20 lakhs.

This move gives more leverage to banks to lend for housing. It will increase the availability of home loans as banks will be encouraged to increase their priority sector lending and thus set aside a greater amount of money towards it.

This comes as a welcome move at a time when it is most-needed. Because of the high inflation rate, the RBI has been increasing the interest rates - repo and reverse repo rates. Consequently, the interest rates on loans, including home loans, have been increasing.

The increase in limit for categorisation of loans as priority sector advances, will help ease out the situation to some extent. Banks will be motivated to increase home loans to the low-cost housing sector. This way, banks can achieve their priority sector advances targets. Simultaneously, those interested in lowcost housing will be able to get finance for the purchases easily.

The priority sector limit is prescribed according to the ownership of banks. While local banks, both public and private sector, have to lend 40 percent of their net bank credit (NBC) to the priority sector as defined by the RBI, foreign banks have to lend 32 percent of their NBCs to the priority sector. Domestic banks have to lend 18 percent of the NBC to the agricultural sector and 10 percent to the weaker sections.

Foreign banks have to lend 10 percent of NBC to smallscale industries and 12 percent as exports credit. There are a vast number of sectors that banks can lend to as priority sectors. The RBI has a detailed note of what constitutes a priority sector, which also includes housing loans, education loans and loans to micro finance institutions, among others.

Source: TimesProperty Dt: 20-5-2011