New one per cent cess on home loans soon

New Delhi, Apr 3: Bad news and more bad news for home loan takers. The rise in interest rates is set to be compounded by a new cess on home loans. Housing finance companies (HFCs) and commercial banks may have to contribute 1 per cent of their annual incremental home loans to a new 'safety fund' proposed to be created under the National Housing and Habitat Policy, which is awaiting final Cabinet nod.

The fund is aimed at providing affordable housing to the economically weaker section (EWS). The mandatory contribution by home loan institutions will increase borrowing costs and is likely to lead to a further rise in interest rates of home loans.

The fund is proposed to be set up under the aegis of National Housing Bank (NHB). "All HFCs and commercial banks will be asked to contribute to the proposed fund. The move is expected to be implemented by the end of this year," a housing ministry official told. "The Centre will contribute an initial corpus of Rs 500 crore into the fund," he said.

While most industry experts are yet to take a call on how much interest rates would go up after this move, most agree that the rise can be anywhere between 0.5 per cent and 1 per cent. "In the advent of some offsetting tax exemptions being offered by the government, the effect on the consumer could be lower. If, however, there are no benefits, we will have to pass the entire burden to the consumer," an NHB executive said.

The move is aimed at bringing about more equality and removing indiscriminate home loan disbursal by banks and HFCs. It is also proposed that 25 per cent of all new constructions in city dwelling areas should be kept aside for EWS, the housing ministry official said. "We have recommended necessary legislation and guidelines for all lending institutions that will have to contribute to the fund," he added.

That the cess is for a noble cause, however, wouldn't be any relief to the middle class Indians who have seen their home loan interest rates almost double over the last three years. And most experts agree that the move could further dampen the home loan market, which is already under siege.

"The home loan segment for FY '06 has grow by about 20-25 per cent, down from last year's growth of 35 per cent. Any move to further raise interest rates could reduce the growth rate to 15-20 per cent," said an ICICI Bank executive. The total home loans disbursed as on March 31, 2007, stood at Rs 2,50,000 crore and about Rs 90,000 crore was the amount of home loans disbursed in FY '06.

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