The Reserve Bank of India has lowered the risk weights of individual home loans, in a move that aims to boost the nation’s real estate sector.
The step has been taken in recognition of the role of the real estate sector in generating employment and economic activity, said Shaktikanta Das, the central bank governor, as part of the monetary policy announcement on Friday.
- All individual home loans, in accordance with the regulatory and development measures statement, will attract a 35% risk weight if their loan-to-value ratio is 80% or less.
- In the case of mortgage loans, where the LTV ratio is greater than 80% but less than or equal to 90%, the risk weights will be greater than 50%.
This benefit will only be available for new home loans until March 31, 2022, the RBI said. “This measure is expected to stimulate bank loans to the real estate sector.”
Banks, in accordance with regulatory standards, must reserve a minimum capital for a loan, calculated on the basis of the risk weight of the loan category. By adjusting risk weights, the regulator allows banks to allocate less capital to loans, making the category more attractive to banks.
Previously, in June 2017, the RBI had introduced a more tiered system of risk weights for individual home loans, based on the size of the loans:
- For home loans up to Rs 30 lakh, the risk weights were set at 35% for a loan with an LTV ratio of less than 80% and 50% for an LTV ratio of less than or equal to 90%.
- For home loans between Rs 30 lakh and Rs 75 lakh, the risk weights were set at 35% for LTV ratios of up to 80%.
- For home loans above Rs 75 lakh, the risk weights were set at 50%.
“The RBI has taken the full loan amount out of the equation and just kept the LTV, which is a push in the right direction. It will depend on the appetite for risk that banks have. Typically, the risk appetite for high-value home loans is low. But yes, on the margin it will make a difference, ”said Jaideep Iyer, director (finance, strategy and investor relations) of RBL Bank.
According to Deo Shankar Tripathi, Managing Director and Chief Executive Officer of Aadhar Housing Finance, the change in the risk weight structure is good for home finance companies looking to make high-value loans at a low LTV ratio. “Lenders will offer a spread interest based on LTV, as their capital requirement will be lower with a low risk weight at a low LTV.”
Increased Retail Loan Limits
The RBI, in its statement on regulatory and development policies, said it is raising the maximum loan limit for a retail borrower.
In accordance with these RBI instructions, exposures included in banks’ regulatory retail portfolio are assigned a 75% risk weight. To achieve the lowest risk weight, loans to a borrower must be within specified limits. Under current guidelines, the maximum aggregate exposure to a single retail borrower cannot exceed Rs 5 million.
“In order to reduce the cost of credit for this segment consisting of individuals and small businesses (ie with a turnover of up to Rs 50 million), and in alignment with the Basel guidelines, it has been decided to increase this threshold to 7.5 rupees. crore, ”the RBI said.
The new limit would apply to all new and incremental exposures to such borrowers, the regulator said. This is expected to boost the much needed credit flow to the small business segment.
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Review of the co-origination model
As part of its regulatory announcements in 2018, the RBI had introduced a co-origination model in which banks and non-bank finance companies that did not accept deposits could work together and extend credit to smaller borrowers.
After a review, the central bank has decided to extend this facility to all NBFCs, including housing finance companies, it said on Friday. The RBI will also allow all priority sector loans to be eligible for co-origination and offer greater operational flexibility to lenders.
Under the original scheme, NBFCs were required to bear 20% of the credit risk of the loans they originated, allowing them to participate in the risk and reward associated with those loans.
The proposed framework will be called the “Co-Loan Model”. The revised guidelines will be published at the end of October 2020.
