The Reserve Bank of India's (RBI) decision to lower the risk weights and standard asset provisioning on select housing loan sizes is credit negative for Indian banks, global credit rating agency Moody's Investors Service said on Thursday.
In its credit outlook report, Moody's said: "The RBI's moves are credit-negative for Indian banks because lower capital requirements will weaken banks' protection from the housing sector, which has grown rapidly in recent years, and will encourage greater lending."
The RBI's notification affects the risk weights of newly originated housing loans in two main categories.
For housing loans totalling more than Rs 7.5 million, the risk weights will fall to 50 per cent from 75 per cent, while for housing loans of Rs 3 million to Rs 7.5 million, the risk weights will decline to 35 per cent from 50 per cent.
At the same time, the RBI is removing the previous distinction of risk weights based on loan-to-value ratios for loans in the same category, Moody's said.
RBI also has lowered the standard asset provisioning requirement to 25 basis points from 40.
According to Moody's, over the next 12-18 months, the overall system credit growth will remain muted given banks' weak balance sheets amid continued asset quality deterioration.
"At the end of March 2017, annual bank credit growth was 7.6 per cent, down from 10.2 per cent the previous year.
Although lower risk weights would boost sluggish credit growth while limiting the effect on banks' capital position, we believe competition for housing loans has significantly increased among banks and non-bank finance companies," Moody's said.
According to Moody's, asset quality performance in the housing-loan segment has remained fairly stable, although banks have confirmed that some areas of weaknesses have emerged in the luxury property segment following the Indian government's demonetisation in November 2016.