RBI prescribes lower risk weights on home loans

In an important ease for house users, especially all those looking for economically priced options, the Reserve Bank of India (RBI) has created a call to let financial institutions to supply mortgage loans for 90 % importance of residential homes that is actually price about Rs 30 lakh. Earlier, the facility was available only for properties that cost up to Rs 20 lakh.

For home loans of up to Rs 30 lakh wherein the LTV ratio is above 80% and of Rs 30-75 lakh where the LTV ratio is above 75% will continue to attract 50% risk weight, the RBI said.

The decision is line with RBI’s statement on 29 September, when it reduced its key interest rate by half a percentage point, that it was reviewing these norms and will release guidelines shortly. Data on home loans disbursed across 13 cities show average LTV has come down from 75 per cent in the third quarter of fiscal 2010 to 66 per cent in the same quarter of fiscal 2015.

Move to give fillip to low-priced housing segment as for loans of up to Rs 30 lakh, the loan-to-value (LTV) ratio will be 90.

Crisil Research estimates that around 80 per cent of home loan borrowers and 70 per cent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation. Therefore, any boost to RoE would be marginal.

As risk weights rise, a bank has to make more provisions and thus the banks’ ability to lend gets restricted. For an LTV of 75-80 per cent, the weight will be unchanged at 50 per cent. For loans exceeding Rs 75 lakh where loans don’t exceed 75 per cent of the value, the risk weight has been kept unchanged at 75 per cent. A 90% LTV indicates that the buyer will have to shell out only 10% of the property value and the rest can be financed through banks. “This effectively implies a home loan ticket size of Rs 37.5 lakh”. Many believe that the step by the central bank would also improve customer confidence and provide a trigger to improve the overall sentiment. Property buyers in tier I cities may not have much to cheer about as home prices for a decent 2BHK is well over Rs 30 lakh anyways. Unlike in the past, now there’s an additional incentive to provide higher down payment to bank while getting the loan sanctioned.