RBI Eases Risk Weights On Home Loans, Raises Retail Lending Limits

The Reserve Bank of India has eased risk weights on individual home loans, in a move that aims at boosting the nation’s real estate sector.

The step has been taken in recognition of the role of the real estate sector in generating employment and economic activity, Shaktikanta Das, governor at the central bank, said as part of the monetary policy announcement on Friday.

• All individual housing loans, according to the statement of developmental and regulatory measures, shall attract a risk weight of 35%, if their loan-to-value ratio is at 80% or lower.
• In case of home loans, where the LTV ratio is higher than 80% but less than or equal to 90%, the risk weights will be higher at 50%.

This benefit will only be available for new housing loans till March 31, 2022, the RBI said. “This measure is expected to give a fillip to bank lending to the real estate sector.”

Banks, according to regulatory norms, must set aside minimum capital against a loan, calculated on the basis of the risk weight of the loan category. By adjusting the risk weights, the regulator allows banks to allocate lower capital against the loans, making the category more attractive to banks.

Previously in June 2017, the RBI had introduced a more staggered risk weights system for individual housing loans, depending on the size of the loans:

• For home loans up to Rs 30 lakh, the risk weights were set at 35% for a loan with less than 80% LTV ratio and 50% for LTV ratio less than or equal to 90%.
• In case of home loans between Rs 30 lakh and Rs 75 lakh, the risk weights were set at 35% for LTV ratios up to 80%.
• In case of home loans above Rs 75 lakh, the risk weights were set at 50%.

“The RBI has taken the total quantum of loan out of the equation and just kept the LTV, which is a nudge in the right direction. It will depend on the risk appetite that banks will have. Typically, the risk appetite on large value home loans is low. But yes, on the margin it will make a difference,” said Jaideep Iyer, head (finance, strategy and investor relations) at RBL Bank.

According to Deo Shankar Tripathi, managing director and chief executive officer at Aadhar Housing Finance, the change in the risk weight structure is good for housing finance companies looking to extend large ticket loans on a low LTV ratio. “Lenders will offer differential interest based on LTV as their capital requirement will be lower with low risk weight on low LTV.”

Hike In Retail Lending Limits

The RBI, in its statement on developmental and regulatory policies, said it is raising the maximum lending limit to a retail borrower.

According to present RBI instructions, the exposures included in the regulatory retail portfolio of banks are assigned a risk weight of 75%. To achieve the lower risk weight, the loans to a borrower must be within specific limits. Under extant guidelines, maximum aggregate exposure to a single retail borrower cannot exceed Rs 5 crore.

“In order to reduce the cost of credit for this segment consisting of individuals and small businesses (that is with turnover of up to Rs 50 crore), and in harmonisation with the Basel guidelines, it has been decided to increase this threshold to Rs 7.5 crore,” the RBI said.

The new limit would be applicable for all fresh as well as incremental exposures toward such borrowers, the regulator said. This is expected to boost the much-needed credit flow to the small business segment.

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Review Of Co-Origination Model

As part of its regulatory announcements in 2018, the RBI had introduced a co-origination model where banks and non-deposit taking non-banking finance companies could work together and extend credit to smaller borrowers.

After a review, the central bank has decided to extend this facility to all NBFCs, including housing finance companies, it said on Friday. The RBI will also allow all priority sector loans to be eligible for co-origination, and will offer greater operational flexibility to the lenders.

According to the original scheme, NBFCs were required to take 20% of the credit risk of the loans they originate, which would allow them to participate in the risk and reward associated with such loans.

The proposed framework will be called as “Co-Lending Model”. The revised guidelines will be issued by end of October 2020.