NEWS
RBI leaves headroom for banks to price home loans cheaper
SBI chairman Dinesh Khara hints at retail and home loan interest rates lowering; HDFC chairman Keki Mistry explains why he feels demand for homes will be on the upsurge.
SBI chairman Dinesh Khara hints at retail and home loan interest rates lowering; HDFC chairman Keki Mistry explains why he feels demand for homes will be on the upsurge.
Banks now have leeway to cut interest rates on home loans after the Reserve Bank of India (RBI) lowered capital that lenders have to set aside on their home loans.
State Bank of India (SBI) chairman Dinesh Khara hinted at lower lending rates in the system as an outcome of these measures. "Linking housing loan risk weights to loan-to-value (LTV) ratio and increasing the limit for risk weights for the retail portfolio up to Rs 7.5 crore are policy innovations that will please the markets and nudge the term structure of rates lower. The policy has also targeted specific sectors that have high forward and backward linkages, notably the retail and real estate sector," he says.
Being the leader in home loans, the SBI often leads the pack in reducing interest rates to stay competitive.
Higher-value loans are expected to get a boost as the RBI has rationalised the risk weights and linked them to the LTV ratio. Earlier, differential risk weights to individual home loans were based on the loan size as well as the LTV.
HDFC Ltd vice chairman and CEO Keki Mistry believes the new RBI measures will lead to increased activity in the real estate sector. "We are seeing demand for homes going up in almost all geographies, especially in the months of August and September. Demand is coming because property prices have remained stagnant for the last three years. If you approach a builder today, there is a probability that you may get a better bargain. The lending rates are low so the demand is created and these RBI measures will boost activity in the sector," he told Indianbankingnews.com.
The central bank has now linked the risk weight to the amount of equity that the home loan borrower is willing to put in, rather than to the quantum of the loan. Higher equity and lower ratio of bank finance will invite lower risk weight for the bank.
The premium home loans of Rs 75 lakh and above, which had a risk weight of 50%, will now have a risk weight of 35%, if the bank finances up to 80% of the loan.
High value home loans, which comprise 12-15% of the total home loan book, had a risk weight of 50%.
If a bank lends up to 90% of the loan, the risk weights will be 50% irrespective of the size of the loan. The lowering of risk weights will mean that banks will have to put aside lower capital buffers, creating surpluses for lending.
The relaxation is applicable on all new home loans sanctioned until 31 March 2022. The benefit is also extended to non-banking financial companies (NBFCs).
"In recognition of the role of the real estate sector in generating employment and economic activity, it has been decided to rationalise the risk weights and link them to LTV ratios only for all new housing loans sanctioned up to 31 March 2022," RBI governor Shaktikanta Das said.
The RBI has enhanced the lending limit (regulatory retail exposure limit) to small businesses and individuals with a turnover of Rs 50 crore to Rs 7.5 crore, from the existing Rs 5 crore. This will be applicable to all fresh lending.
Banks can also enhance the loans of existing borrowers. Banks will be benefited on all new housing loans that will be sanctioned for the next 18-month period.
"The good thing is that the RBI's relaxation is applicable till 22 March 2022. This measure is expected to give relief to big-ticket loans, say, above Rs 75 lakh, where risk weight is higher. The present share of such loans is around 12-15% of the total housing loan portfolio. Assuming a growth of 20% for the next 18 months, this could reduce the capital requirement of around Rs 500 crore, which could enable banks to ease rates to boost demand," said Ecowrap, the economic publication of the SBI.
