The Hindu Business Line : Higher risk weight on home loans may hit disbursals

Mumbai, Aug. 10 Higher risk weight attached to home loans under Basel II norms could discourage banks from pursuing aggressive lending policies, according to a recent report released by Fitch Ratings.

Risk weight on housing loans is based on the loan/value ratio (LTV) and could increase from 50-75 per cent to 100 per cent for LTVs above 75 per cent as per the Basel II norms. LTV is the percentage of the loan against the value of the house.

The Basel II guidelines do not specify whether the LTV calculations should be done on an ongoing basis or at the point of disbursing the loan. The report suggests that the LTV calculations should be done on an ongoing basis, especially during periods of falling prices. According to the report, the differential risk weighting on different asset classes under Basel II could help guide the proportion and direction of bank lending, such as lending to higher rated corporates or hedging exposures to small-scale industries with permitted collaterals and guarantees.

Fitch expects an increase in rating penetration in India, as banks would have to assign a risk weight of 150 per cent to unrated corporate exposures in excess of Rs 50 crore. This limit for unrated corporate exposures would further reduce to Rs 10 crore from March 2009.

Though most banks reported a reduction in the capital adequacy ratio (CAR) after migrating to Basel II, a few banks reported a capital relief on account of higher exposure to better-rated corporates as well as savings on the regulatory retail portfolio, the report said.

The report points out the problems arising in using national ratings for risk weighting corporate exposures as the comparison between capital adequacy ratios of Indian banks and their foreign counterparts becomes difficult.

While banks are integrating interest rate risk, credit concentration risk, liquidity risk and reputation risks into their risk management systems, the report says that internal capital planning process in most large banks tends to increase the CAR threshold by about 200-300 basis points higher than the regulatory minimum ratio of nine per cent.

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