Home buyers could soon get cheaper loans if banks pass on the benefits of lower risk weights and provisions, as they look to gain share in a competitive market. The new rules come into effect on Thursday and could potentially free up Rs 1.22 lakh crore, or 15% of the total home loans outstanding in the banking system as on April 28. The benefits to banks are the biggest for home loans of over Rs 75 lakh. The Reserve Bank of India (RBI) on Wednesday reduced the risk weight on certain categories of loans as also the standard asset provisioning requirement on all home loans to 0.25% from 0.4% earlier, freeing up more capital for banks. Rajnish Kumar, managing director at State Bank of India (SBI), said the decision to lower provisioning would free up Rs 450 crore of provisions for the bank. “We will have to calculate how much of the benefit can be passed on to customers,” he said. Bankers said the move would heighten competition in the housing loan space and, consequently, interest rates would fall. “This will allow players with less capital to focus on the housing sector. The increased competition will result in a focus on service quality and maybe even pricing,” a senior executive with a large public sector bank observed. Housing loans of between Rs 30 lakh and Rs 75 lakh with a loan-to-value (LTV) ratio of up to 80% will now attract a risk weight of 35%. Loans for above Rs 75 lakh, with an LTV ratio of up to 75%, will have a 50% risk weight. Earlier, home loans of between Rs 30 lakh and Rs 75 lakh with an LTV ratio of up to 75% would be assigned a 35% risk weight and those with an LTV between 75% and 80% would have a risk weight of 50%. The risk weight for loans above Rs 75 lakh with an LTV of up to 75% earlier attracted a risk weight of 75%.
The standard asset provisioning mandated for all home loans was brought down to 0.25% from 0.40% earlier. The risk weight to be assigned to home loans of up to Rs 30 lakh — classified as affordable housing loans by most large banks — remains unchanged at 35% for cases where the LTV is less than or equal to 80% and at 50% for cases where the ratio is between 80% and 90%. Last month, most large home loan players, including State Bank of India, ICICI Bank, HDFC, Indiabulls Housing Finance and Axis Bank, had aggressively reduced rates on affordable home loans, bringing them down to 8.35% in some cases for loans up to Rs 30 lakh.
At a post-policy press conference on Wednesday, RBI deputy governor NS Vishwanathan said, “We have observed that delinquency is generally among the lowest in the home loan segment, and the past home loan portfolio of banks has also responded well to targeted countercyclical measures taken on the segment.” Vishwanathan added that in view of this, and also having regard to the forward and backward linkages that an increase in the home loan segment can give rise to, it has been decided to reduce the risk weight on certain categories of home loans and also the standard asset provisioning.
Vishwanathan observed that coupled with the 50-basis-point reduction in the statutory liquidity ratio, the reduction in risk weights will provide the liquidity banks need to “bring buoyancy to the home loan segment”. Housing loans as a category have beaten the rate of growth in non-food credit in recent months. According to RBI data, housing loans grew 13.4% year-on-year in April, while the rate of growth of overall non-food credit in the same month was 5%.