High ticket home loans might get cheaper after RBI’s THIS announcement

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Did you know if you have taken a home loan of let’s say Rs.84 lakhs for Rs.1.2 crore property, then the bank has to set aside another Rs.42 lakhs to maintain solvency or to be on the safer side? So for lending you a loan of Rs.84 lakhs, bank’s actual capital being used is Rs. (84+42=)1.26 crore. It’s also called as risk weight. Cruel wasn’t it!

This risk weights used to get decided by RBI’s notification of second MPC in FY2018. PFB the table:

Sr. No.	Outstanding loan	LTV ratio (%)	Risk Weight (%)	Standard Asset Provision (%)
1.	Up to Rs.30 lakh	< 80	35	0.25
2.	Up to Rs.30 lakh	>80 and < 90	50	0.25
3.	Above Rs.30 lakh and up to Rs.75 lakh	< 80	35	0.25
4.	Above Rs.75 lakh	< 75	50	0.25

Before taking a deeper look at the table, let’s understand the concept of LTV first. LTV stands for loan to value ratio. Let’s again take the discussed example. So for Rs.1.2 crore property, bank is giving you Rs.84 lakh loan, which means (84 lakh / 1.2 crore)*100 = 70% is the LTV ratio here. Rest 30% or 36 lakhs you have to pay from your pocket while buying the property.

Now, let’s look at the table. The loan example that we are discussing till now is equivalent to 3^rd row in the table. Above 75 lakh loan amount (Rs.84 lakh for us) and LTV ratio is less than 75% (70% for us). You can easily observe that Risk weight is associated with two factors: The loan amount and LTV ratio in percentages.

What’s changed now?

In its latest MPC meeting, RBI has decided to link the risk weight only to LTV ratio for new home loans till March 31, 2022. Thus whatever might be your loan amount, if the LTV stands below or equal to 80%, then risk weight will be flat 35% and if LTV is in between 80% to 90%, then risk weight will be flat 50%, whatever might be the loan amount.

So for our case of Rs.84 lakh loan for Rs.1.2 crore, LTV stands at 70%. Thus, revised risk weight will be 35% now, which means the bank has to set aside Rs. (35% of 84 lakhs)29.4 lakhs instead of previous Rs.42 lakhs. Thus total capital required now for lending the same loan will be Rs. (84+29.4) 1.134 crore. You can ignore the standard asset provision parameter for now, as it will be constant 0.25% for all types of home loan.

New table will look like below:

Sr. No.	Outstanding loan	LTV ratio (%)	Risk Weight (%)	Standard Asset Provision (%)
1.	Any Amount	< 80	35	0.25
2.	Any Amount	> 80 and < 90	50	0.25

How will this benefit to individual home loan seekers?

As with the new rule banks have to set lesser capital aside for solvency, more capital will now will be available for lending to housing sector. Specially, for above Rs.75 lakh loan segment, the cost of lending for banks will substantially reduce. Banks will now have more capital at hand and can offer more loans to high-end individual buyers at cheaper interest rates.

In another announcement, RBI has extended its earlier co-origination of loans model to all NBFCs as well as Housing Finance Corps (HFCs) and renamed the model has ‘Co-lending model’. Earlier, this model was limited to a certain category of NBFCs. Under this model, the traditional/major bank will lend money to NBFCs as well as HFCs, and in turn, they will lend it further to end customers. This will improve credit flow to the unserved and underserved sector of the economy. It will also share the risk and rewards between these lenders.

Both Revised Risk weight linkages to LTV as well as Extension of the co-lending facility to HFCs will boost demand in the real estate sector. As it’s the crucial sector which offers major employment and survival of many other industries (like cement, steel, etc.) are linked with it, this move will help in the overall recovery of the economy.

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