Home >News >India >Revised LTV norms to help realty sector

The Reserve Bank of India on Friday rationalized risk weights on home loans in a step that is likely to free up capital for lenders and may also help in a marginal reduction in home loan rates.

“The move shall give the much-needed impetus for the housing sector. At the same time, home loans will become accessible and competitive for the customers," said Hardayal Prasad, managing director and CEO of PNB Housing Finance.

Regulatory norms require banks to set aside capital for loans to cover defaults. For home loans, banks calculate it on the basis of two parameters—the amount of loan disbursed, and the percentage of the loan offered against the property value, also known as loan-to-value (LTV) ratio.

For instance, in case of a home loan of less than 30 lakh, if a bank were to lend up to 80% of the property value, the risk weight would be 35%. But if the LTV is between 80% and 90%, the risk weight would be 50%. Also, the risk weight for home loans above 75 lakh was 50%. For those between 30 lakh and 75 lakh, the risk weight was 35%.

RBI had introduced these staggered risk weights around three years ago.

In his speech, RBI governor Shaktikanta Das said the risk weights will be rationalized until 31 March 2022. Banks will now only consider the LTV ratio when calculating the risk weight, and the size of the loan will not be relevant. All loans, irrespective of the amount, with an LTV of 80% or less, will have a risk weight of 35%. Similarly, the risk weight will be 50% for all loans that have an LTV between 80% and 90%.

The move will leave more money with banks. “It will free up more capital for loans above 75 lakh and could lower the interest rate in this segment," said Ratan Chaudhary, head of home loans,, an online marke-tplace for financial products.

He said that there are already regulations in place on the maximum LTV ratio for various loan sizes.

For loans below 30 lakh, a lender can finance up to 90% of the property value, and between 30 lakh and 50 lakh, it can offer an LTV of up to 80%. These will remain unchanged.

However, for loans above 75 lakh, RBI permits financing up to 75% of the property value, and it is for this segment that the risk weight has been rationalized.

“The move will provide some tailwinds to housing loan disbursals from a supply-side perspective. This is because it will bring about greater capital efficiency for lenders in housing loan disbursals of more than 75 lakh ticket size," said Krishnan Sitaraman, senior director, Crisil Ratings.

“The potential for any material uptick appears subdued as that will depend upon pickup in real estate sales and demand increase for home loans from home buyers," he said.

Rationalizing of risk weight will not have a direct impact on home loan borrowers. As banks will need to set aside lesser capital for higher-ticket loans, they will have better liquidity. According to bankers, the central bank is expecting that this would translate into increased lending.

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