NHB measure likely to ensure higher loans for home buying

Saikat Das
Moneycontrol.com

The National Housing Bank (NHB), the regulator for housing finance companies (HFCs), is likely to introduce a scheme of mortgage guarantee cover, which will ensure higher credit availability for home loan borrowers. Given its implementation, all HFCs will now have bigger room to disburse home loans that also may be at a slightly cheaper rate.

"Our measure is aimed at making affordable housing a reality in India," R V Verma, Chairman and Managing Director, National Housing Bank told Moneycontrol.com. 

"Under the mechanism, if a bank or a housing finance company takes cover from a mortgage guarantee company registered with the RBI, it will get the benefit of capital relief against its loans through lower risk weightage. Loan to value ratio will go up giving higher credit to a home loan borrower. We will soon come out with a circular on this," he said.

Loan to value (LTV) ratio suggests the maximum portion of the property value that a borrower can take as loan. If one takes a loan of Rs 80 against the property value of Rs 100, then LTV ratio stands at 80%. A higher LTV ratio means a borrower needs to arrange less amount of his own to buy his dream home.

As per existing norms, a HFC requires to set aside Rs 12 as capital if it lends Rs 100 at a risk weight of 100%. With a cover from any mortgage guarantee company (MGC) rated as 'AAA', the risk weight will come down to 20% and a HFC will only need Rs 2.40 as capital for the same loan (i.e. 12% of Rs 20 = Rs 2.40). Similarly, guarantee cover from a 'AA' rated MGC will mean a risk weightage of 30%, the NHB proposes.

Essentially, this means that all HFCs can use the "capital relief" to extend higher credit. However, they have to pay a small fee for taking mortgage guarantee cover. This (fee) will be in-built in the loan amount.

An MGC will also ensure HFCs' asset quality. Before giving cover to any lender’s home loan portfolio, they appraise the lender as well as its assets very thoroughly and scrutinize borrowers’ creditworthiness.

However, this measure, according to Verma will be subject to a stricter regime of discipline and originating standards. "Moreover, the lenders will also be in a position to pass on the benefit to customers in terms of interest cost on account of lower risk as well as capital relief," he said.

NHB is shortly launching India's first such company in association with International Finance Corporation (IFC), Asian Development Bank (ADB) and US-based financial security firm Genworth Financial (GF). NHB holds 38% stake in the entity. The Reserve Bank of India introduced guidelines for registration of mortgage companies in 2009 but later revised it in 2010.

saikat.das@network18online.com