In a move that could give some breather to the realty sector and home loan borrowers, the Reserve Bank of India (RBI) has eased risk weights on loans of up to Rs 75 lakh, provided the borrower brings in a bigger contribution towards financing the property.
Reduction in risk weights entails lower provisioning for banks and, thus, frees up more funds for lending.
In a notification on Thursday, the central bank prescribed lower risk weights on home loans where the loan-to-value (LTV) ratio is lower by
5-10 basis points.
Home loans of up to Rs 30 lakh where the LTV ratio is less than or equal to 80% and those of Rs 30-75 lakh wherein the loan to value ratio is below or equal to 75% will attract a lower risk weight of 35% instead of 50% earlier.
For home loans of up to Rs 30 lakh wherein the LTV ratio is above 80% and of Rs 30-75 lakh where the LTV ratio is above 75% will continue to attract 50% risk weight, the RBI said. The LTV ratio cannot exceed 90% for loans of up to Rs 30 lakh and is capped at 80% for loans between Rs 30 lakh and Rs 70 lakh.
Given that the LTV ratio is slightly lower where risk weights have been reduced, it ensures that the borrower has contributed a larger amount towards financing and, thereby, reduces the credit risk for the bank.
Although this move benefits banks by bringing down their provisions, it is unclear if it could prod them to reduce spreads above base rate for home loans.
Loans have already become cheaper with most banks paring their base rates, but the benefit for home loan borrowers has been limited with some lenders increasing the spread over base rate for them.
For instance, the country’s largest lender, State Bank of India, reduced its base rate by 40 bps to 9.30%, but increased the spread for home loans to 20 bps from 5 bps.