The Reserve Bank of India’s (RBI’s) move to pause rate cuts will hit the beleaguered real estate and auto sectors hard. These sectors were expecting another rate cut by the central bank to help revive sagging consumer demand.
CEOs said benefits from the previous rate cuts are yet to play out completely and the real estate industry is still reeling from the liquidity crisis as consumers are not coming forward to buy new houses or cars.
Real estate developers were expecting a rate cut of 50 to 100 basis points which would have provided a boost to the government’s recent initiatives to rev up the economy.
“One-time roll over to restructure bad loans would have been a logical step across industries. Thus, the decision to wait and watch the outplay of the previous cuts will go against the current sentiments,” said Niranjan Hiranandani, MD of real estate firm Hiranandani Constructions.
A rate cut would have helped the balance sheets of builders, which are defaulting on bank loans as customers are not booking under-construction flats as they fear the developer won’t be able to complete the project in time. Several builders like Peninsula Land in Mumbai have failed to repay bank loans. Customers are not booking new homes even though builders have reduced prices of their under-construction flats by 20 per cent in Mumbai.
“Customers don't want to take any risk with an under-construction project which, in turn, has stopped the cash flow to builders,” said a Mumbai-based developer. The automobile companies said a further cut in the interest rates would have helped them sell cars to fence-sitters, who are waiting for a better deal. India’s largest carmaker Maruti Suzuki’s domestic sales fell 1.6 per cent year-on-year in November. Other carmakers, too, reported fewer sales.
“With the RBI cutting the GDP growth forecast by a whopping 170 basis points, the industry is again staring at an uncertain future,” said a luxury auto dealer in Mumbai.
At the same time, a rate cut would have helped banks and NBFCs (non-banking finance companies) to revive their sagging credit growth. Sale of new home loans and auto loans from NBFCs have slowed down after the DHFL scam came to light. ‘
The retail loan growth rate had slowed to 7.3 per cent in the first half of 2019 -- slowest growth in the last five years. On the other hand, personal loan growth accelerated to 17.2 per cent in October 2019, from 16.8 per cent in October 2018, the RBI data showed.
This comes at a time when banks are complaining that corporate credit has also slowed down to just 2-3 per cent. Barring new airports, city gas projects, and renewable power projects, there is no demand from other core sector companies, bankers said.
“Our corporate book is seeing muted growth at about 2-3 per cent. There is lack of demand from the corporates… but not because the bank is unwilling to lend,” State Bank of India’s MD Arijit Basu said.
State-owned banks account for close to 90 per cent of impaired loans, and have cumulatively written-off nearly $30 billion in bad loans in the past three years. Most of these loans were given to core sector firms.