Mumbai: In a major boost to affordable housing, the RBI on Thursday allowed banks to offer home loans up to 90 per cent for properties that cost up to Rs 30 lakh, besides lowering the risk weights for such loans. According to the new norms, for loans up to Rs 30 lakh, the risk weight will be 35 per cent if the loan-to-value (LTV) ratio is less than 80 per cent. However, if the LTV ratio is between 80-90 per cent, the risk weight will be 50 per cent.
Earlier, for loans up to Rs 20 lakh, a LTV of 90 per cent was allowed but with a 50 per cent risk weight. For loans between Rs 30-75 lakh where the LTV is less than 75 per cent, the risk weight is 35 per cent while if the LTV is more than 75 per cent but less than 80 per cent, the risk weight will be 50 per cent. Earlier, loans above Rs 20 lakh and up to Rs 75 lakh, the LTV had to be 80 per cent with a risk weight of 50 per cent.
For a loan amount above Rs 75 lakh with a LTV of less than 75 per cent, the risk weight remains unchanged at 75 per cent. LTV denotes how much of the property value a bank can lend to the borrower. A 90 per cent LTV means that a home loan borrower will have to shell out only 10 per cent of the property value and the rest can be financed through banks. Loans up to Rs 30 lakh fall under the “affordable” category in urban areas.
Risk weight is the provisioning that banks need to make. Lowering the provisioning frees bank capital. Lower risk weights on low-ticket home loans will encourage banks to lend more to the smaller ticket home loan segment. However, this may lead to ‘lower capital in relation to (higher) risk’ in the affordable housing segment.
Vibha Batra, VP at ICRA, said, “Lowering risk weights (further from 50 per cent) in the affordable housing segment that is yet to be credit tested, the asset quality is likely to be more vulnerable and volatile and could translate into thin capital cushion to cover the unexpected losses.”
“However, from a risk perspective, this may be negative as the target borrower’s credit profile is weaker and more volatile (owing to limited cushion for exigencies and to absorb income shocks) as compared with the prime salaried home loan borrower,” added Batra. This is also reflected in the relatively higher gross NPA (in per cent) for lower ticket size (less than Rs 5 lakh) home loans of public sector banks (4.4 per cent as on March 31, 2014) vis-a-vis home loans with ticket sizes greater than Rs 25 lakh (0.62 per cent as on March 31, 2014). As for variability in asset quality indicators, the gross NPA changed by 110 basis points (bps) in low-income category over one year, the change was only 39 bps for home loans greater than Rs 25 lakh during the same period. Larger variability may warrant higher capital requirements for this segment from prudent risk management perspective, said Batra.
RBI’s move comes in the wake of a government plan, called ‘Housing for all’, to build 20 million houses for the urban poor by 2022, which coincides with 75 years of independence.
Sanjay Dutt, managing director, Cushman and Wakefieldm, said, “Lower risk weight on housing loans from the current 50 per cent would enable banks to free more funds to lend for low-cost housing. This would give a fillip to the government’s ‘Housing for all by 2022’ mission.” RBI governor Raghuram Rajan said a few days ago, “With a view to improving affordability of low-cost housing for economically weaker sections and giving a fillip to ‘Housing for All’, it is proposed to reduce the risk weights applicable to lower value but well-collateralised individual housing loans.”
