The steep 250 basis points increase in policy rates by the Reserve Bank of India (RBI) since May 2022 appears to be impacting loans taken by retail borrowers. While growth in most retail loan categories have slowed, the slowdown in housing loans is significant since it accounts for almost half of the retail loans.

Recent data from the RBI on gross bank credit by major sectors shows that the year-on-year growth in housing loans was 13.1 per cent in August 2024, a steep drop from 40.5 per cent in August 2023. In August 2022, housing loans stood at ₹17.8 lakh crore, growing to ₹25 lakh crore by August 2023. However, by August 2024, the amount increased to only ₹28.3 lakh crore, showing a sluggish growth.

Reasons behind the slowdown

The slowdown in housing loans appear primarily driven by rising interest rates as RBI’s policy rate hikes are transmitted to bank lending rates. In 2021, the State Bank of India offered home loans at rates between 6.8 per cent and 7.2 per cent, which have now increased to 8.5 per cent to 9.7 per cent in 2024. Similarly, Bank of Baroda’s home loan rates went up from 6.5 per cent in 2021 to 8.4 per cent in 2024. ICICI Bank saw its rates climb from 6.8 per cent in 2021 to 8.8 per cent in 2024, and Kotak Mahindra Bank’s rates increased from 6.5 per cent in 2021 to 8.8 per cent in 2024.

Vivek Iyer, Partner at Grant Thornton Bharat, explained, “Housing EMI consumes a significant portion of an individuals budget, and interest rates have a big role to play in the same. Elevated interest rates have played a large role in subduing this demand (for housing loans). We expect the housing demand to go up in the last quarter of FY25 as we expect an interest rate cut in the February 2025 MPC.”

Rahul Mehrotra, MD and CEO of Religare Housing Development Finance Corporation Ltd, pointed out that rising interest rates, economic uncertainty, regulatory changes, and increased rental demand are among the key factors contributing to the decline in housing loans in India.

Subha Sri Narayanan, Director, CRISIL Ratings, explained the growth rate of housing loans by banks should be analysed considering the HDFC Ltd-HDFC Bank merger. After adjusting for the merger, the growth rate from August 2022 to August 2023 was around 13.5 per cent. However, from August 2023 to August 2024, the growth rate increased to over 18 per cent. “This would include the effect of the incremental housing loans booked on the bank’s balance sheet post the merger,” added Narayanan

Home prices increase

The increase in home prices could also be suppressing demand. Data from National Housing Bank’s Housing Price Index (HPI), which tracks the growth of property prices, shows consistent growth across India. The four-quarter moving average for India’s HPI rose from 128 in June 2023 to 131 in December 2023, reaching 136 in June 2024. Among cities, Hyderabad experienced the fastest growth, with its HPI moving from 176 in June 2023 to 191 in June 2024. Other cities also recorded increases in housing prices in June 2024.

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