Reserve Bank of India Pressures India's Growing Middle Class (HDB, IBN)

This could well put a brake on the great Indian dream of buying a home. Reserve Bank of India [RBI] has classified home loan as an exposure to the real estate sector in respect to the banks giving the loan. With this measure, it has put a cap on the frenzied growth of the home loan sector for the banks. Real estate is one of the three sectors which is classified as sensitive with respect to banks, the other two being commodities and capital markets. (source: Business Standard).

This decision will deal the hardest blow to those banks which have recently been very aggressive in home loan lending like ICICI Bank (IBN). It is the number one player in this sector along with HDFC bank (HDB). ICICI Bank alone disbursed Rs 25,740 core home loans in 2005-06, which took its outstanding home portfolio as of March 31, 2006 to over Rs 40,000 core. The RBI has not recommended any cap for bank's exposure to these sectors but left it to the respective bank boards to decide the limit on their own.

It now needs to be seen how much cap will these banks put and what effect it will have on their overall lending and growth. Housing was recently a big growth driver, especially for these private banks with customers with rising income who were ready to take home loans on an EMI basis.

HDB-IBN 1-yr comparison chart: