Small towns driving home loan demand

Home loan demand in India has managed to grow in the last one year despite continuous interest rates hikes by the banks. Sachin Kumar & Sachin Dave report.

Home loan demand in India has managed to grow in the last one year despite continuous interest rates hikes by the banks.

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Lending by Indian banks to the housing sector increased by 14% to Rs369,900 crore at the end of October 2011 from Rs324,748 crore at the end of 2010. It had risen by 12% in October 2010 over the previous year, according to data from the Reserve Bank of India (RBI).

"The demand for home loans will remain strong going forward as a large number of households in India still does not have their own houses," said Jairam Sridharan, senior vice-president and head consumer lending and payments, Axis Bank. "We are seeing healthy demand from smaller cities."

To control risisng inflation, the RBI has hiked the repo rate 13 times by a cumulative 3.5 percentage points since March 2010, forcing banks to increase lending rates including interest rates on home loans.

According to industry experts, demand from smaller cities is driving home loan growth. "There is a substantial difference between real estate prices in metros and smaller cities," said Anand Narayanan KB, national director with real estate consultancy Knight Frank (India). "But there is more or less a wage parity amongst buyers in metros and smaller cities, so a buyer in tier II and tier III city has more disposable income, and can buy a house easily compared to say someone staying in Mumbai."

Big developers such as DLF, Shapoorji Paloonji, Ansal Properties have also forayed into tier II and tier III cities.