Earlier, all loans above Rs 75 lakh carried the same risk weight

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Borrowers of high value home loans – Rs 75 lakh and above – would benefit by the Reserve Bank of India’s move on Friday to rationalise risk weightages attached to some categories of borrowings in this segment. As a result of this rationalisation, banks would have less risk to bear, and hence, would be in a position to lend more, benefiting consumers for home loans as well as the weak real estate market which is in need of a stimulus. According to Liases Foras, around 40% of the nearly 10 lakh unsold units in top eight cities lie in the Rs 75 lakh and above range category.

Commenting on RBI’s move, Keki Mistry, vice-chairman and CEO, HDFC, said that it is the right policy as the risk is ultimately dependent on the amount of equity that the individual has put into the property and not dependent on the size of the loan. “What seems to have been done is that the cap on amounts have been removed, and therefore, everything is linked to the LTV ratio which makes housing loans much safer,” he said.

Siddhartha Mohanty, MD & CEO, LIC Housing Finance, said, “It will help us to sell bigger ticket size loans without providing larger capital. We will now focus on mid and premium segment as well, apart from affordable housing. We are expecting that 30-40% of our growth in Q3 may happen from mid and premium segment in top seven metro cities.”

RBI governor Shaktikanta Das said, “recognising the criticality of the 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 counter-cyclical measure, to rationalise the risk weights by linking them only with loan-to-value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022”. The governor added that such loans shall attract a risk weight of 35% in cases where LTV is less than or equal to 80%, and a risk weight of 50% where LTV is more than 80% but less than or equal to 90%.

Simply put, this means that now all loans, even big ones with low LTV, would carry low risk weight. At present, risk weight on housing loans is based on the amount of loan and LTV. This has now been changed and linked with LTV alone. Earlier, all loans above Rs 75 lakh carried the same risk weight, irrespective of LTV.

Till now, loans up to Rs 30 lakh with LTV for less than 80% had a risk weight of 35%. Loans up to Rs 30 lakh with LTV of more than 80% but less than 90%, the risk weight was 50%. For loans of above Rs 30 lakh and up to Rs 75 lakh with LTV of less than 80%, the risk weight was 35%. For loans above Rs 75 lakh with LTV of less than 75%, the risk weight was 50%.

With Friday’s rationalisation, the risk weight for all home loans with an LTV of 80% or less has been set to 35% and the risk weight for all home loans with an LTV between 80% and 90% has been set to 50%.

This, according to analysts, would enable banks to allocate lower capital against the loans based only on the LTV, especially in the case of high-value loans, which means a lower capital charge, and therefore, more capital for the banks to lend. This can lead to lower interest rates, and act as a further fillip for buyers.

Developers, too, are enthused with the move. According to Kamal Khetan, chairman and managing director, Sunteck Realty, the measure would provide a boost to the ongoing projects and inventory pick up for luxury developers. “The home buyers across all price-points will be able to access more capital with ease. Additionally, it would help the lender on the capital adequacy front and enable them to provide more loans. We expect the RBI to extend the measure beyond March 2022 in the coming days,” he said.

Jaxay Shah, national chairman, Credai, said, “The standard provision of 0.25% will now not be applicable which in turn means that risk provision of housing loans will now be lesser by 0.25%. Hence, the banks will have to make lesser provision on this. This will lead to better profitability for lenders and may also have a positive impact on the capital and cost for lenders.”

Krishnan Sitaraman senior director, Crisil Ratings, observed that liberalisation in risk weights for individual housing loans by removal of ticket size criteria and linking it only to LTV will provide some tailwinds to housing loan disbursals from a supply side perspective. “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,” he said.

The market reacted with caution on the news as after rising nearly 1% during the day trade, the Nifty Realty Index pared gains to end the day at 215.45 points, down 1.6%.