RBI cautions banks on LTV ratio norms manipulation

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RBI cautions banks on LTV ratio norms manipulation

The Reserve Bank of India (RBI) on Friday instructed all banks to strictly adhere to its prescribed loan to value or LTV ratio without manipulating the original property value. Earlier in 2010, it had instructed lenders not to exceed LTV ratios of 80% and 90% for home loans above and below Rs 20 lakh respectively.

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Moneycontrol Bureau

The Reserve Bank of India (RBI) on Friday instructed all banks to strictly adhere to its prescribed loan to value or LTV ratio without manipulating the original property value. Earlier in 2010, it had instructed lenders not to exceed LTV ratios of 80% and 90% for home loans above and below Rs 20 lakh respectively.

"It has been brought to our notice that banks adopt different practices for deciding the value of the house property while sanctioning housing loans. Some banks include stamp duty, registration and other documentation charges in the cost of the house property," RBI said in a notification.

In simple terms, a LTV ratio at 80% means that a home loan borrower can be sanctioned a loan upto Rs 8 lakh against the property value of Rs 10 lakh. Hence, an overstated property price will help fetch higher loans, which in turn will be a violation of the original LTV ratio.

Due to inclusion of those supplementary charges the original value stands inflated. Consequently, The LTV norms as mandated by the RBI get diluted.

"Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effectiveness of LTV norms is not diluted," the banking regulator cautioned.

So what prompted the RBI to raise the alert?

"RBI must have gone through sufficient (industry) experience," M S Raghavan, Executive Director, the Bank of India told Moneycontrol.com.

"Since April, 2010; the home loan interest rates have gone up by 250-300 basis points. This has caused rise in borrowers' equated monthly installments (EMIs). Consequently, there could be strain on home loan assets. At our bank, we are strictly maintaining all LTV norms and there is no great strain on our home loan assets," he said.

An industry calculation shows, a 25 bps increase in interest rate for a home loan of Rs 1 lakh for the tenure of 20 years will add additional Rs 16 to your EMI amount. Banks normally ensure that a home loan borrower's monthly take-home should be 40% of his/her total monthly salary after all deductions including the home loan repayments, investments and others.

Amid general concerns over banks' asset quality especially on their corporate accounts, this RBI measure is seen as a step in time to check retail asset deterioration.

Saikat Das

saikat.das@network18online.com