RBI’s latest monetary policy rationalises risk weights on home loans; asks banks to focus only on loan-to-value
In a move that is aimed at making home loans easily available, the Reserve Bank of India (RBI) rationalized risk weightages attached to some categories in the segment. This move is likely to make more credit available to borrowers at a better rate. Real estate experts believe that it will help in improving sentiments in a weak real estate market.
In his statement, RBI Governor Shaktikanta Das said, “recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the interlinkages with other industries, it has been decided, as a countercyclical measure, to rationalise the risk weights by linking them only with Loan-to-value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022.”
Das added that such loans shall attract a risk weight of 35 per cent in cases where LTV is less than or equal to 80 per cent, and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 per cent.
Niranjan Hiranandani, ASSOCHAM president says that RBI’s decision to rationalise the risk weights on home loans and link them to LTV ratios alone will give a boost to the real estate sector. In particular, this step would benefit borrowers of higher-value loans. It would ensure that more credit is available to borrowers. This move is a much-appreciated step recognising the role of the real estate sector in generating employment and economic activity.
Making risk weightages simpler
In order to keep tabs on the quality of banks assets and to protect the banks’ capital from loans turning bad, the RBI assigns a risk weight to all assets owned by banks, including loans disbursed to individual borrowers. The risk weight is a function of the associated risk estimated by the RBI on loans for different sectors, and it varies for each category of loan (personal, home, car and education). Adhil Shetty, CEO, Bank Bazaar, says, “Until now, the RBI had a more staggered risk weights system for home loans, which depended on the loan size as well as the LTV. For instance, in the case of home loans of less than Rs 30 lakh, with LTV of 80 percent or less, the risk weight was 35 percent.”
Loans with LTV ratio less than or equal to 90 percent had a risk weight of 50 percent.
An LTV denotes how much loan can be sanction to a borrower by the lending institutions against of the property value. For instance, an 80 percent LTV indicates that the borrower can take a loan of up to 80 percent value of the property. So, if the property value is Rs 1 crore, a loan of up to Rs 80 lakh can be taken and the rest has to be financed by home buyers from their own pockets.
For higher loan amounts (LTV of 90 percent), the risk weight was higher (50 percent), than those with a lower LTV.
“For home loans above Rs 75 lakh, the risk weights were set at a flat 50 per cent, and for loans between Rs 30-75 lakh with an LTV of 80 percent or less, the risk weights were set at 35 per cent,” adds Shetty.
Will RBI’s move benefit home loan borrowers?
A low risk weightage means the requirement of capital provision for lending institutions will come down, which will eventually reduce their cost and, as a result, it will lead to lower lending rates for borrowers.
Deo Shankar Tripathi, Managing Director & CEO, Aadhar Housing Finance, says, ”At present, the risk weight on housing loans is based on the amount of loan and LTV. Now it is linked with LTV alone. Earlier, all loans above Rs 75 lakh carried the same risk weight irrespective of LTV. From now, even big loans with low LTV will carry low risk weight. This is good for housing finance companies (HFCs) that offer big-ticket loans with low LTV and also a boost to the real estate sector. Lenders will offer a differential interest based on LTV, as their capital requirement will be lower with low risk weight on low LTV.”
Shetty shares similar thoughts. He says that the risk weights have now been rationalised to consider only the LTV for home loans sanctioned until March 31, 2022. So, during this period, the risk weight for all home loans with an LTV of 80 per cent or less has been set to 35 per cent and the risk weight for all home loans with an LTV between 80 per cent and 90 per cent has been set to 50 per cent. “This is a nudge in the right direction, as the regulator allows banks to allocate lower capital against the loans based only on the LTV, especially in the case of high-value loans, which means a lower capital charge, and therefore, more capital for the banks to lend. This can lead to lower interest rates, and act as a further fillip for buyers looking to invest in properties,” added Shetty.
(With inputs from Hiral Thanawala)(The writer is a freelancer)