RBI tweaks risk-weight norms to help high-value housing loans2 min read . Updated: 09 Oct 2020, 11:34 AM IST
- It said banks can lend up to ₹7.5 crore to individual retail borrowers and small businesses and still be eligible for a 75% risk weight. The limit was at ₹5 crore earlier
MUMBAI: The Reserve Bank of India (RBI) on Friday tweaked the risk-weight norms for retail housing loans, a move that reduces the amount of capital banks need to hold against large-ticket loans.
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 till 31 March 2022, the RBI has allowed banks more room to lend to borrowers for high-value properties, without worrying about a higher capital charge. Of course, the LTV ratio must be maintained within the limits prescribed by the central bank to avail of this benefit. The LTV ratio is dependent on how much equity a borrower puts in the purchase and how much of the total value is financed by the bank.
“Recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the interlinkages 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.
According to RBI, retail housing loans will attract a risk weight of 35% 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%.
“This measure is expected to give a fillip to bank lending to the real estate sector," it said.
RBI also said banks can lend up to ₹7.5 crore to individual retail and small business borrowers and still be eligible for a 75% risk weight. The limit was at ₹5 crore earlier.
“As per the present RBI instructions, the exposures included in the regulatory retail portfolio of banks are assigned a risk weight of 75 per cent. For this purpose, the qualifying exposures need to meet certain specified criteria, including low value of individual exposures," it said, adding that the measure is expected to increase the much-needed credit flow to the small business segment.
RBI on Friday kept the repo rate, the key interest rate at which it lends to commercial banks, unchanged at 4%. The central bank sounded an ominous note on the growth outlook for the country, even as it pretty much echoed what rating agencies have also warned about earlier.
The RBI's MPC has pegged the real GDP growth for FY21 to contract by 9.5%.
The decision to keep the interest rates unchanged is in line with market expectations as inflation has remained above 6% - the higher end of the central bank’s medium-term target.