Home loans set to get cheaper as RBI cuts provisions, risk weights

To spur war among lenders to grab existing loans

Home loans are about to become cheaper with the Reserve Bank of India (RBI) relaxing provisions for individual housing loans. It will not only bring down housing loan rates, but also intensify competition among lenders to acquire existing loans from each other.

State Bank of India Chairman Arundhati Bhattacharya said, “The large cut in inflation projection by the RBI in the monetary policy is in consonance with ground realities and is likely to create room for rate cuts in the latter half of the year. The decision to reduce the risk weights for home loans over the Rs 30-lakh category will release capital for the banking industry and is a positive move.”

The RBI has relaxed risk weight requirements as against the loan-to-value (LTV) ratio for loans above Rs 30 lakh. For loans above Rs 30 lakh and up to Rs 75 lakh, the risk weight has been brought down to 35 per cent with LTV ratio up to 80 per cent. For loans above Rs 75 lakh, with LTV ratio up to 75 per cent, risk weight has been reduced from 75 per cent to 50 per cent.

The central bank also brought down the standard asset provision to 0.25 per cent for all individual housing loans. The RBI has also lowered the statutory liquidity ratio (SLR) by 50 basis points to 20 per cent. The SLR is the proportion of deposits a bank is required to maintain in the form of liquid assets such as government securities and gold.

ICICI Bank Managing Director And Chief Executive Chanda Kochhar said the cut in SLR and reduction in risk weights for housing loans were positive moves that would support bank liquidity and encourage growth in housing loans.

RBI Deputy Governor N S Vishwanathan said that in the past, the home loan portfolio of banks had responded well to targeted counter-cyclical measures. These measures (risk weights and standard asset provisions) along with the lowering of SLR should together provide liquidity to the banks and give buoyancy to the housing loan segment.

Bank analysts say the RBI’s changed rules shall cause greater competition and lead to a battle for securing customers in the home loan market.

Karthik Srinivasan, group head, financial sector ratings, at ICRA, said banks may become aggressive in hawking housing loans due to the relief in risk weightage and standard asset provision. He also said there may also be an increase in balance transfers and moving of home loans from one lender to another.

The housing loan portfolio of banks rose by 13.4 per cent in 12 months up to April 2017. Outstanding housing loans stood at Rs 8.16 lakh crore. In the preceding 12 months, the housing loans portfolio had grown by 18 per cent, according to RBI data.