RBI’s Latest Move Could Make Home Loans Cheaper for Buyers

In a bid to help the real estate sector, the Reserve Bank of India said that it will rationalise the risk weights and link them to the Loan-to-Value (LTV) ratios for new housing loans sanctioned up to March 31, 2023. “Recognising the criticality of 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 2023,” the central bank said on Friday.

What it means for home loan borrowers

The Loan-to-Value (LTV) ratio refers to the proportion of a property’s value that a lender can borrow through a loan. Lenders set the LTV ratio for a loan applicant after factoring in their 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 the home buyer foots ₹20 lakhs and the bank chips in ₹ 80 lakhs. 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 is exacerbated, explained Nishant Singh, partner at 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 lakhs but does not exceed ₹75 lakhs, the bank is required to maintain a capital provision of 50% of the loan value. When the loan amount exceeds ₹75 lakhs, the bank requires a capital provision of 75% of the loan amount.

Currently, risk weights are tied to both the size of the loan and the loan-to-value (LTV) ratio. By removing the loan size from the equation, the central bank has allowed banks more room to lend to borrowers for high-value properties.

The risk weight assigned to LTV will provide banks with a buffer for additional lending. It will also help them lower lending rates, as they will have spare capital to lend.

“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 a regulatory perspective, the LTV of a home loan book will reveal its true 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.

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