Festive gift: RBI raises minimum home loan size to Rs 30 lakh from Rs 20 lakh
The rocky world of Indian real estate was delivered a sweetener last week. For those seeking much-needed respite, the RBI announced fresh norms on loan-to-value (LTV) ratios and risk weights for individual housing loans.
In a sector where life depends — literally — on easy access to loans, the announcement by the apex bank could not have come at a better time. The terms of endearment are clear too. The new minimum housing loan slab is up to Rs 30 lakh, with (i) an LTV ratio of less than or equal to 80 per cent, to have a risk weight of 35 per cent and (ii) an LTV ratio of greater that 80 per cent and less than or equal to 90 per cent, to have a risk weight of 50 per cent.
The earlier guidelines had outlined a minimum housing loan category of up to Rs 20 lakh with an LTV ratio of 90 per cent and risk weight of 50 per cent. The second housing loan category is above Rs 30 lakh and up to Rs 75 lakh, with (i) an LTV ratio of less than or equal to 75 per cent, to attract a risk weight of 35 per cent and (ii) an LTV ratio of greater than 75 per cent and less than or equal to 80 per cent, to attract a risk weight of 50 per cent.
The loan category in earlier guidelines was Rs 20 lakh to Rs 75 lakh, with an LTV ratio of 80 per cent to attract risk weight of 50 per cent. The third housing loan category is above Rs 75 lakh, with an LTV ratio of less than or equal to 75 per cent, to have a risk weight of 75 per cent, which is similar to the earlier guidelines.
The latest move has gone down well with leading stakeholders in the realty sector — developers, banks and homebuyers. “From a housing finance perspective, RBI is keen to improve the affordability of low-cost housing for economically weaker sections (EWS). Thus, the proposal to reduce risk weights to lower value is a positive for the housing sector. However, there is a need to define and classify affordable housing depending on the location, as there are huge variations in prices between metros and outskirts,” says Keki Mistry, vice chairman and CEO, HDFC.
A Bank of America Merrill Lynch research report points out that new guidelines are expected to give a strong fillip to the housing loan market in India, as the RBI has raised the minimum home loan size to Rs 30 lakh from Rs 20 lakh, which will attract a lower risk weight of 35 per cent vs 50 per cent earlier. This effectively implies a home loan ticket size of Rs 37.5 lakh, which is likely to help the banks to price housing loans better and generate higher returns. This may also provide the upside to expected home loan growth of 18-20 per cent.
Observes the report prepared by Rajeev Varma and Veekesh Gandhi, both research analysts, DSP Merrill Lynch (India): “We expect that banks with a large share of housing loans in their portfolios will likely benefit. Amongst the banks, we believe key beneficiaries will be SBI, ICICI and Axis Bank. We expect housing finance companies (HFCs) to benefit assuming that National Housing Bank (NHB), which is regulator for HFCs, also lowers the risk weight in sync with the RBI. The HFCs, which are likely to be key beneficiaries, are HDFC, LICHF and IHFL.”
Other rating agencies too have taken notice. Crisil, for instance, expects interest rate on home loans to come down by another 25-30 basis points (bps) over the next few months, triggered by the 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 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, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal,’’ the report explains.
Crisil research estimates that nearly 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. Over the years, LTV ratios for home loans have been moving down. Data on home loans disbursed across 13 cities show that 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.
Realty analysts believe that nearly a quarter of the incremental housing stock supply in the top 10 cities would have a price point lower than Rs 40 lakh. The RBI has over the years been relaxing regulatory norms for home loans, taking cognisance of the healthy asset quality and low credit losses in this segment.
In June 2013, the RBI created a sub-category within the commercial real estate (CRE) segment for residential housing (CRE-RH) and notified a lower risk weight for this segment compared with the CRE segment. Subsequently, in July 2014, the apex bank permitted banks to raise long-term infrastructure bonds for the purpose of funding affordable housing. These bonds are exempt from mandatory norms such as cash reserve ratio and statutory liquidity ratio.
Crisil believes that lower risk weights in a scenario where competition in the home loan market is intensifying and interest rates cycle is easing, would push down interest rates for home loans, thereby limiting any gains on the RoE front for banks. 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.
It notes “Over the past one week, two new players — Bajaj Finance and Hinduja Leyland Finance — have been granted housing finance licences by the NHB. Because of increasing competition, the cumulative market share of the top three HFCs in aggregate home loans outstanding of HFCs has declined from 85 per cent in fiscal 2011 to 79 per cent in fiscal 2015.”
Points out Anshuman Magazine, chairman & MD, CBRE South Asia, “The RBI’s proposal to reduce the minimum risk weightage on individual housing loans for low- cost homes will also help revive sales, apart from lending support to the government’s ‘housing for all’ programme. ”
Concurs Shishir Baijal, chairman & managing director, Knight Frank India, “A 50 bps cut in repo rate by the RBI was need of the hour when the real estate sector is reeling under tremendous pressure as both sales and new launches have plummeted to the tune of around 60–70 per cent. A total reduction of 125 bps this calendar year, in all probability, will give much-needed boost to the market and we believe that both developers and consumers will have ample reasons to take the right steps to revive the market. However, the transmission of this rate cut by banks to consumers has to be more aggressive to help the market reap the benefits of this reduction.”
Thanks to this latest gambit, housing loan market is also likely to see a significant pick-up in volumes. Predicts Rishi Mehra, co-founder, Deal4loans, “This will help in meeting government’s ‘housing for all’ target by 2022. Along with rate cuts, this means the housing loan market should see a pick-up in volumes. Home and car loan rates should also fall by 50 basis points. Expect home loan rates to come at 9 per cent.”
The developer community, too, is enthused. “We believe the coming festive season will see a spurt. Unsold inventory levels are at an all-time high, especially in metro cities. It’s time banks reduced interest rates and also increased lending in the housing segment. An acceleration in demand at this point will go a long way in sustaining recovery of the sector and the economy and greatly benefit realty developers grapple with huge debt, high interest cost and financing deficit,” says Mohit Goel, CEO, Omaxe.
Points out Diipesh Bhagtani, executive director, Jaycee Homes, "If risk weightage goes down then banks will block lesser capital and in turn loans should become cheaper and if there is an additional capital available for home loans, then the bank will lend more to the sector. So according to me, it will give a great boost to the slow moving real estate market and will make loans cheaper."
Consensus seems to be veering around this feel good factor. Says Tom Chaudhary, CEO & founder, FIRE Capital and chairman, Astrum Homes, “The reduction is very timely as the festive season is approaching and buyers always look for some discount or relaxation in interest rates from bank. However, the reduction in CRR would have been much appreciated by the sector as it would have given a free hand to the banks to increase the supply of loanable money”.
Echoing similar sentiments, Vineet Relia, managing director, SARE Homes, states: “It is a buyer-friendly move. This is a significant decision, particularly for the NCR and Mumbai markets, where the demand for residential properties has been subdued. We were hoping that banks would ensure proper transmission of rate cuts to consumers. In that view, a decreased risk weightage is a great strategy to maintain a positive sentiment in the market and generate demand for homes. The government’s decision on the possibility of scrapping stamp duty on transfer of properties would also be a game changer at a time when customer purchase sentiment could fill the gap created by increasing land prices and unsold inventory,” he adds. Looks like ache din are finally here.
