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Economy

RBI Says Duh, Real Estate Demand Can Be Driven Far More If Developers Cut Prices

Rajan, in an interview with Arundhati Bhattacharya (Chief of SBI) shows some real gumption when AB asks him:

“I was thinking if it is possible for a little while, could something of this [Teaser lower rate loan for housing, below base rate] could be allowed given the fact that this is one of the portfolio where NPAs are the lowest”.

Rajan shot back, saying that:

I do believe that if real estate developers who are sitting on unsold stocks bring down prices, that will be a very great help to the sector because once there is a sense that prices have stabilised, more people will be willing to buy.

Basically – don’t ask me for concessions, the RE guys should cut prices and that will drive demand far more than teaser loans!

Thats true; there is a lot of unsold stock (and secondary ready-for-sale stock) that’s in the market now, but prices are being held up because the developers aren’t yet up shit creek. They are all expecting that if they can get a little more leeway everything will be all right.

Well, this is a massive bubble and bubbles end badly. The best that a developer can, and should do, is to cut prices and get inventory out as soon as possible. Beyond a certain point, the problem will be with the banks who have funded these guys.

The Unsaid Truth: Banks Should Cut Their Base Rates instead!

What Rajan should have said, in my opinion, is that assuming that SBI wanted to provide for lower rates, they should have cut their base rates!

It is true that if they do cut such rates, every loan will pay lower, even existing ones. That is the true definition of floating rates! And in reality that’s the only way that rates will be transmitted. If banks refuse to cut their base rates, they should be given no concessions.

At this time banks are not cutting rates even though they maintain net interest margins at 3% or more. Until they can learn to recognize the losses that already exist, raise more capital and crunch the NIMs to lesser levels, they cannot compete.

The effort cannot be from RBI – it is time now for us to demand rate cuts from banks, and from developers, by simply not buying until they do.

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