Home loans: RBI encourages banks to seek more security

To encourage banks to seek more collateral for giving home loans, the Reserve Bank of India on Thursday prescribed lower risk weights where the borrower brings higher contribution. This is expected to free up capital for banks to give more loans.

Bankers say this move comes at a time when interest rates are coming down and competition to push home loans is increasing. Further, borrowers could have a tendency to borrow more.

The central bank has rejigged the slabs in the individual loan category — up to ₹30 lakh (against ₹20 lakh earlier); above ₹30 lakh and up to ₹75 lakh (₹20 lakh and up to ₹75 lakh); and above ₹75 lakh (unchanged).

Under the lowest slab (up to ₹30 lakh), the central bank has pegged the risk weight at 35 per cent for a loan-to-value (the amount of loan given as percentage of the value of the house) of less than or equal to 80 per cent.

For example, if a customer wants to buy a house costing ₹37.50 lakh and he is willing to bring in 20 per cent (or ₹7.50 lakh as his own contribution), the bank will give loan amounting to ₹30 lakh.

In this case, for the purpose of capital provisioning, the bank will treat the value of this loan as ₹13,12,500 (since risk weight is 35 per cent of the loan amount) and capital (at the rate of 9 per cent or ₹1,18,125 in this case) will have to be set aside.

More capital If the loan-to-value (LTV) increases (to greater than 80 per cent and less than 90 per cent), the bank, accordingly, will have to set aside more capital as the risk weight will increase to 50 per cent.

For loans in the second slab (above ₹30 lakh and up to ₹75 lakh), the RBI said the risk weight will be 35 per cent for LTV less than or equal to 75 per cent. It will increase to 50 per cent for LTV greater than 75 per cent and less than 80 per cent.

In the case of loans above the ₹75 lakh slab, the LTV as well as the risk weight remains unchanged at less than or equal to 75 per cent and 75 per cent, respectively.

Hitherto, for loans up to ₹20 lakh, the risk weight was at 50 per cent for LTV of 90 per cent; in the next slab too it was 50 per cent for LTV of 80 per cent.

In 2013, the central bank had carved out a separate sub-sector called Commercial Real Estate – Residential Housing (CRE-RH) from the Commercial Real Estate (CRE) Sector.

It did so as loans to residential housing projects under the CRE Sector exhibit lesser risk and volatility than the CRE Sector taken as a whole.

CRE-RH would consist of loans to builders/developers for residential housing projects (except for captive consumption) under the CRE segment. Such projects will ordinarily not include non-residential commercial real estate.

However, integrated housing projects comprising some commercial space (that is, shopping complex, school, etc.) can also be classified under CRE-RH, provided the commercial area in the residential housing project does not exceed 10 per cent of the total Floor Space Index (FSI) of the project.

In case the FSI of the commercial area in the predominantly residential housing complex exceeds the ceiling of 10 per cent, the project loans should be classified as CRE and not CRE-RH.

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