State-owned banks have, against better business sense, lowered home mortgage rates as part of the government’s efforts to pump some steam into a cooling economy. A week after the Reserve Bank reduced short-term interest rates the country’s biggest mortgage providers, HDFC and ICICI Bank, which together lent every other rupee to home buyers last year, are in no mood to oblige. The government, naturally, had to lean on the banks it owns--and which, apart from the State Bank of India, pick the crumbs off the home loan table to cut rates. This they did grudgingly. If their cost of raising deposits is around 10 per cent, the logic for lending to home buyers at 8.5 per cent has to be compellingly non-economic.
Price controls have little to recommend themselves from a macro-economic perspective. Historically, however, our governments have had a fascination for them that refuses to go away. When HDFC and ICICI Bank argue their mortgage rates will come down once interest rates decline secularly across the economy, policy could have been reasonably expected to address the big picture. The US Federal Reserve is considering lowering its short-term rate to zero, entering a zone of negative real interest rates that Japan has been inhabiting for over a decade now. We, on the other hand, choose to hold a gun to the heads of our banks. Accustomed as they are to running by fiat, how does the government ensure that public-sector banks will, indeed, lend at these unviable rates?
With over 100 applicants for each of the 5,000-odd houses the Delhi Development Authority is selling, the pent-up demand for housing in India is an obvious contender for any stimulus package our policy makers are drawing up. An explicit subsidy on home mortgages, as the banks are seeking, would be pure adrenalin for consumer demand. Not just for the first-time buyer, it frees up the spending capacity of existing home owners as well. This is the closest, apart from lower taxes, the government can come to a direct transfer of funds to households, a section of the economy that can spend itself out of a slowdown. Let’s not forget, India’s blistering growth rates for the last five years have been fuelled by the credit-led consumption demand of a young population trying to buy itself a lifestyle.