Banks may be able to offer home loans at lower interest rates as the Reserve Bank of India (RBI) has decided to rationalise the risk weights for these loans, linking them only with the loan-to-value (LTV) ratio.

Applicability

The central bank was, however, silent on the applicability of the aforementioned regulatory relaxation for housing finance companies.

With the rationalisation of the risk weights, banks’ capital charge requirement for home loans over ₹75 lakh will come down.

So, they may be in a position to pass on the lower capital requirement benefit to new borrowers by lowering interest rates.

LTV ratio is the percentage of a property value that a bank is willing to give as home loan.

Home loans shall attract a risk weight of 35 per cent 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, according to the RBI.

The RBI termed the rationalisation of the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022, as a counter cyclical measure. The central bank emphasised that this move recognises the criticality of the real estate sector in the economic recovery, given its role in employment generation and inter-linkages with other industries. This measure is expected to give a fillip to bank lending to the real estate sector, it added.

Hitherto, differential risk weights were applicable based on the size of the loan as well as the LTV ratio.

Rajkiran Rai G, Deputy Chairman, Indian Banks’ Association, and MD and CEO, Union Bank of India, said: “...Linking the risk weight only to Loan to Value Ratio for individual housing loans is a positive measure. “Due to Covid-19 lockdown, construction is a beaten down sector. Since things are getting revived, this enabling policy support will help in augmenting the credit flow to the sector.”

Punjab National Bank Managing Director and CEO, Ch SS Mallikarjuna Rao, opined that the move to rationalise risk weights and link them to LTV ratios only for new housing loans sanctioned up to March 31, 2022, will give impetus for high-value apartments or those who want to purchase costly houses.

Krishnan Sitaraman, Senior Director, Crisil Ratings, observed that the liberalisation in the risk weights for individual housing loans by removal of ticket size criteria and linking it only to LTV will provide some tailwinds to housing loan disbursals from a supply-side perspective.

This is because it will bring about greater capital efficiency for lenders in housing loan disbursals of more than ₹75 lakh ticket size.

Related Topics
comment COMMENT NOW