Mumbai: Crisil Research expects interest rate on home loans to come down by another 0.25 to 0.30 per cent over the next few months, triggered by the Reserve Bank of India’s (RBI) move to lower risk weights on select home loans (up to Rs 75 lakh) where borrowers are willing to put in more money and thus lower the loan-to-value (LTV) ratio.
Theoretically, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks. However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, Crisil believes that banks will have to pass on the benefit to borrowers. Therefore, any boost to return on equity (RoE) would be marginal.
Competition in the home loan space has increased manifold in the last 3-4 years, as more financiers have entered the market, attracted by low penetration, relatively high and stable growth rates, and healthy asset quality.
Over the past one-week, two new players, Bajaj Finance and Hinduja Ley-land Finance have been granted housing finance licences by the National Housing Board (NHB).
The RBI has lowered risk weights on housing loans of up to Rs 75 lakh from 50 per cent to 35 per cent in cases where the borrower puts in at least 20 per cent of the value of the home as own equity for loans up to Rs 30 lakh and 25 per cent of the value of the home as own equity for loans between Rs 30 lakh and Rs 75 lakh.
Crisil Research estimates that around 80 per cent of home loan borrowers and 70 per cent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation.
LTV ratios for home loans have been moving down over the years. Data on home loans disbursed across 13 cities show average LTV has come down from 75 per cent in the third quarter of fiscal 2010 to 66 per cent in the same quarter of fiscal 2015. This means a higher proportion of new loans would meet the criteria for lower risk weights.
Home loan borrowers in smaller cities are likely to be the biggest gainers from the RBI move due to limited supply at affordable price points in the larger cities. As per Crisil Research’s analysis, around a quarter of the incremental housing stock supply in the top 10 cities would have a price point lower than Rs 40 lakh.
On RBI’s decision to allow LTV of up to 90 per cent for home loans up to Rs 30 lakh, Harshil Mehta, the CEO of DHFL, said that the move would improve the affordability of low-cost housing for low and middle-income customers.
“The decision comes at the right juncture for customers as financial institutions and builders are offering offers / schemes that will enable the low and middle-income customer to buy a home of his own,” he added.
