RBI cuts risk weight for individual home loans

If LTV for loans is between 80-90%, risk weight would be 50%

To boost demand for low-cost housing, the Reserve Bank of India (RBI) on Thursday reduced the risk weight for individual housing loans of up to Rs 75 lakh. The minimum risk weight for individual housing loans has been reduced from 50 per cent to 35 per cent.

The risk weight for commercial real estate has been left unchanged at 100 per cent.

For loans of up to Rs 30 lakh, the central bank increased the loan-to-value (LTV) ratio to 90. LTV is the highest loan amount a bank can disburse, as a proportion of the property price.

Now, banks will have to allocate less capital if risk weights are lower. Most banks have a sizeable portfolio of loans of up to Rs 75 lakh. As capital costs will come down due to lower risk weight, the move is expected to translate into lending rate cuts by banks.

“This will be a boost for the low-ticket housing segment (up to Rs 30 lakh) … increasing the loan-to-value will encourage builders to focus on this segment. With the interest rates coming down, we expect more sanctions and disbursement for banks,” said Rajiv Anand (group executive and head of retail banking), Axis Bank.

According to the new norms, for loans of up to Rs 30 lakh, the risk weight will be 35 per cent when the LTV is up to 80 per cent. If the LTV for loans is 80-90 per cent, the risk weight will be 50 per cent.

RBI said earlier, all loans of up to Rs 20 lakh with LTV of 90 per cent had a risk weight of 50 per cent.

In the Rs 30-75 lakh loan bucket with LTV of 75 per cent, the risk weight will be 35 per cent (earlier 50 per cent). For an LTV of 75-80 per cent, the weight will be unchanged at 50 per cent.

For loans exceeding Rs 75 lakh where loans don’t exceed 75 per cent of the value, the risk weight has been kept unchanged at 75 per cent.

Vibha Batra, senor vice-president and co-head (financial sector ratings), Icra, said the credit profile of loans of up to Rs 30 lakh could be riskier and volatile.

“The capital is basically a cushion to absorb unexpected losses. With reduction in risk weights, banks might save on capital but they might also be less prepared to absorb variability in defaults,” Batra said, adding for loans of Rs 30-75 lakh, the default rates were low.

At its fourth bimonthly review of monetary policy last month, RBI had said risk weights would be reduced to boost affordable housing.

“At present, the minimum risk weight applicable on individual housing loans is 50 per cent. To improve affordability of low-cost housing for economically weaker sections and low-income groups and give a fillip to ‘housing for all’, while being cognisant of prudential concerns, it is proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans,” the central bank had said.