Loan-to-Value (LTV) ratio refers to the proportion of the property value that a lender can borrow through a loan
By removing the loan size from the equation the central has allowed banks more room to lend to borrowers for high-value properties
To make home loans cheaper, the Reserve Bank of India on Friday said that it will rationalise the risk weights and link them to Loan-to-Value (LTV) ratios for new housing loans sanctioned up to March 31, 2022. “Recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the inter-linkages with other industries, it has been decided, as a countercyclical measure, to rationalise the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to 31 March 2022," the central bank said on Friday.
"Rationalising risk weightage on home loans and linking it to Loan to Value (LTV) ratio will effectively result in higher credit flow to the real estate sector, which is positive news for the sector," said Dhruv Agarwala, group chief executive officer (CEO) of Housing.com, Makaan.com and Proptiger.com.
"This move by the central bank addresses the urgency required to boost the real estate sector in the country. Home loans will become accessible and competitive for the customers," said Hardayal Prasad, MD & CEO, PNB Housing Finance.
What it means for home loan borrowers
Loan-to-Value (LTV) ratio refers to the proportion of the property value that a lender can borrow through a loan. Lenders set the LTV ratio for a loan applicant after factoring in his credit profile and the regulatory caps for the concerned loan type set by the regulator. For instance, if a bank underwrites a home purchase of ₹1 crore wherein a home buyer foots ₹20 Lacs and the bank chips in Rs. 80 Lacs. Then, the LTV would be Rs. 80 Lacs (value of the loan) divided by ₹1 crore (cost of the home purchased). So, the LTV would be 0.8. If the LTV increases, the bank’s risk exacerbates, explained Nishant Singh, partner, IndusLaw.
The central bank prescribed the risk weightage on a home loan based on its size. The bank must maintain 35% of the regulatory capital if the loan amount is up to ₹30 Lacs. If the loan amount is higher than ₹30 Lacs but does not exceed ₹75 Lacs, the bank is required to have the capital provision at 50% of the loan value. When the loan amount exceeds ₹75 Lacs, the bank needs the capital provision at 75% of the loan amount.
At present, the risk weights are linked to size of the loan as well as the loan to value (LTV) ratio. By removing the loan size from the equation the central has allowed banks more room to lend to borrowers for high-value properties.
"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," explained Anuj Puri, chairman, ANAROCK Property Consultants.
"For the lower loan ticket size, where the bank’s capital requirement may go up depending on the LTV for a specific loan, it will provide better risk coverage to the bank. From the regulatory side, LTV of a home loan book will reveal its real risk characteristics. Overall, when the home loans’ risk weightage is pegged to the LTV, it will mutually benefit the lenders and the borrowers," Singh clarified.
"With reduced risk weights for loans above ₹75 lakh, the cost of lending to this customer segment will come down for the lenders as they will have to set aside a lower amount of capital for such loans. Hence, lenders are likely to pass on the benefit to this customer segment by reducing the lending rates for loans above ₹75 lakh," said Ratan Chaudhary, head of home loans, Paisabazaar.com.
"Rationalisation of risk-weights would translate into lower provisioning requirement for funding borrowers for mid & high-value properties by the lenders," Gaurav Pawra, CEO – housing finance, Clix Housing Finance Ltd said.
"With the new risk weights announced yesterday by the RBI, loan value has been delinked in ascertaining the risk weights. Banks requirement of capital would come down due to the lower risk weightage based on LTV. This might transform to lower interest rates; however, it all depends upon the risk appetite of the bank," said Divakar Vijayasarathy, Founder and Managing Partner, DVS Advisors LLP.
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