Lower risk weight on “Real estate”, can lower interest rates

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Recently, Reserve Bank of India (RBI) rationalized risk weightages attached to some categories in the segment. This move is likely to make more credit available to borrowers at a better rate. Real estate experts believe that it will help in improving sentiments in a weak real estate market. Such loans shall attract a risk weight of 35% in cases where LTV is less than or equal to 80% and a risk weight of 50% where LTV is more than 80% but less than or equal to 90%.

RBI’s decision to rationalise the risk weights on home loans and link them to LTV ratios alone will give a boost to the real estate sector. In particular, this step would benefit borrowers of higher-value loans. It would ensure that more credit is available to borrowers. This move is a much-appreciated step recognising the role of the real estate sector in generating employment and economic activity.

In order to keep an eye on the quality of banks assets and to protect the banks’ capital from loans turning bad, the RBI assigns a risk weight to all assets owned by banks, including loans disbursed to individual borrowers. The risk weight is a function of the associated risk estimated by the RBI on loans for different sectors, and it varies for each category of loan (personal, home, car and education). Loans with LTV ratio less than or equal to 90% had a risk weight of 50%.

An LTV denotes how much loan can be sanction to a borrower by the lending institutions against of the property value. For higher loan amounts (LTV of 90%), the risk weight was higher (50%), than those with a lower LTV. For home loans above ₹ 75 lakh, the risk weights were set at a flat 50% and for loans between ₹ 30-75 lakh with an LTV of 80% or less, the risk weights were set at 35%.

A low risk weightage means the requirement of capital provision for lending institutions will come down, which will eventually reduce their cost and, as a result, it will lead to lower lending rates for borrowers. The risk weights have now been rationalised to consider only the LTV for home loans sanctioned until 31st March 2022. So, during this period, the risk weight for all home loans with an LTV of 80% or less has been set to 35% and the risk weight for all home loans with an LTV between 80% and 90% has been set to 50%. This is said to be a step in the right direction, as the regulator allows banks to allocate lower capital against the loans based only on the LTV, especially in the case of high-value loans, which means a lower capital charge and therefore, more capital for the banks to lend. This can lead to lower interest rates and further benefit for buyers looking to invest in properties.

 

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