In a bid to boost demand for high value home purchases and thereby the housing sector, the Reserve Bank of India (RBI) on Friday allowed banks to only consider the Loan to Value Ratio (LTV) while setting the risk weights (capital that banks have to set aside) for new home loans.
Until now, the risk weight of home loans was determined on the basis of loan amounts and LTV ratios. Higher loan amounts led to higher risk weights, requiring banks to set aside higher capital while sanctioning the loan.
The latest announcement regarding the home loan risk weights has done away with the requirement of factoring in loan amount while setting risk weights for fresh home loans sanctioned till March 31, 2022. The move would benefit incremental housing loans in higher ticket size of over Rs 75 lakh (below 80 per cent LTV) which currently attracts 50 per cent risk weight. Experts said that the move should reduce capital cost for banks and help in transmission and
therefore improve credit offtake.
All fresh home loans with LTV ratios of or less than 80 per cent will attract risk weight of 35 per cent whereas those with LTV ratios of above 80 per cent to 90 per cent will attract risk weight of 50 per cent, the RBI said.
"Recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the interlinkages with other industries, it has been decided, as a countercyclical measure, to rationalise the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022.
Such loans shall attract a risk weight of 35 per cent where LTV is less th an 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 percent. This measure is expected to give a fillip to bank lending to the real estate sector," said the RBI.
Raj Kiran Rai, managing director and chief executive officer of Union Bank of India said, “From the regulatory announcements, linking the risk weight only to Loan to Value Ratio for individual housing loans is a positive measure. Due to Covid 19 lock down, 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. It is pertinent to note that construction is a labour intensive
sector. It will also support several other industries which depend on the construction sector. Inclusion of HFCs in co-origination model schemes is again a positive signal to the housing segment.
Krishnan Sitaraman, Senior Director, CRISIL Ratings said, “Liberalization in risk weights for individual housing loans by removal of ticket size criteria and linking it only to Loan to Value (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
Rs 75 lakh ticket size. At the same time, the potential for any material uptick appears subdued as that will depend upon pick up in real estate sales and demand increase for home loans from home buyers.”
“This measure is expected to give relief to big ticket loans say above Rs 75 lakh, present share of which is around 12-15 per cent of the total housing loan portfolio, where risk weight is higher.
Assuming a growth of 20 per cent for next 18 months this could reduce
the capital requirement of around Rs 500 crore, which could enable
banks to ease rates to boost demand,” said an expert.