RBI Announces Steps To Boost Credit Flow To Real Estate Sector
Workers labor in a construction site at residential project (Photographer Ruhani Kaur/Bloomberg)

RBI Announces Steps To Boost Credit Flow To Real Estate Sector


In a bid to increase flow of credit to the real estate sector, the Reserve Bank on Friday rationalised the risk weightage to loan-to-value ratio for all new housing loans sanctioned up to March 31, 2022.

As per a notification issued by the RBI, new housing loans will attract a risk weight of 35% where LTV is less than 80% and a risk weight of 50% where LTV is more than 80% but less than 90%

This measure, according to the RBI, is expected to give a fillip to bank lending to the real estate sector which is critical for economic recovery, given its role in employment generation and the interlinkages with other industries.

"As a countercyclical measure, it has been decided to rationalise the risk weights, irrespective of the amount. The risk weights for all new housing loans to be sanctioned on or after the date of this circular and upto March 31, 2022," the notification said.

The requirement of standard asset provision of 0.25% will continue to apply on all such loans, the notification added.

Also read: Covid-19 Impact: PE Investment In Real Estate Down 57% In Jan.-Sept. At $2.3 Billion

Commenting on the RBI's move, Square Yards Chief Executive Tanuj Shori said, "The linking of risk weightage only to LTV ratio vis-a-vis the earlier practice of risk weightage with both pricing and LTV augurs well for the sector particularly for high-end properties which have been facing severe downward demand pressures."

Anarock Chairman Anuj Puri said the LTV ratio is calculated by dividing the amount borrowed by the value of the property in percentage terms.

For instance, if one purchases a home valued at Rs 80 lakh and for this makes a down payment of Rs 10 lakh, Rs 70 lakh will need to be borrowed.

Also read: Swelling India Borrowing Places Companies’ Fate in RBI’s Hands

"The risk weightage assigned to LTV will free up banks' capital for additional lending. It will also help them to bring down the lending rates because they will have spare capital to lend," Puri said.

Since banks will have additional capital to lend, availing home loans at attractive interest rates will be possible, he added.

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