Budget 2020

Will RBI’s relaxed loan-to-value rules make home loans cheaper?

By DK Agarwal

RBI has rationalised the risk weights and link them to loan-to-value (LTV) ratios for all new home loans sanctioned up to March 31, 2022. This is expected to make the product attractive for both borrowers and lenders.

According to RBI, retail housing loans will attract a risk weight of 35 per cent, where LTV is less than or equal to 80 per cent and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 per cent.

The linking of the risk weight of home loans to LTV for all new housing loans is a step in the right direction and will benefit the real estate sector. This measure is expected to give a fillip to the industry, as it is expected to result in higher credit flow.

The loan-to-value (LTV) ratio refers to the proportion of the property value that a lender can borrow through for a purchase. Previously in June 2017, RBI had introduced a more staggered risk weight system for individual housing loans, depending on the size of loans. Until now, risk weight of home loans was determined on the basis of loan amount and LTV ratio.

The new measure is expected to provide relief to big ticket borrowers, say above Rs 75 lakh, present share of which is around 12-15 per cent of the total housing loan portfolio, where the risk weight is higher. According to the regulatory norms, banks must set aside minimum capital against a loan, calculated on the basis of the risk weight of the loan category. By adjusting the risk weight, the central bank allows banks to allocate lower capital against such loans, making the category more attractive to them.

With the revision of the risk weightage, the requirement of capital provision for banks has come down. Now, they can offer differential interest based on the LTV, as their capital requirement will be lower thanks to the low risk weight on low LTV.

The real estate sector has been undergoing a prolonged slowdown. Covid-19 has come as a new blow to the sector, leading to a temporary halt in project launches. Even banks are reluctant to lend and buyers have become financially stressed. However, there are some signs of revival in the real estate sector and this should help augment credit flow.

To boot, Home sales recovered to 29,520 units in the September quarter from 12,730 units in June quarter. The Bangalore market saw significant improvement in business and almost reached pre-Covid sales level. The Kerala market has performed even better than last year. Even Pune and Delhi markets are showing some improvements. Many real estate companies are now focusing on cash flow and debt management at an operational level, and are trying to not let their debt levels rise.

Green shoots are being seen in the real estate sector, and they are now giving hope that all the sectors will move in pace towards recovery. In September quarter earnings, IT biggies such as Wipro and Infosys have announced incremental growth in employee counts. This signals good growth in demand for houses too.

And RBI’s latest initiative will encourage banks to push housing loan products with attractive features. Home loans will become more easily accessible and competitive for customers. Interest rates are already at lower levels. As demand returns slowly, larger, established developers are poised to gain the most. Therefore, investors can think of allocating a small portion of their investments towards real estate in a staggered manner.

(DK Aggarwal is Chairman and MD, SMC Investments and Advisors.)