Key points:
- To make home loans cheaper, the Reserve Bank of India on Friday, October 9 said that it will rationalize the risk weights and link them to Loan-to-Value (LTV) ratios for new housing loans sanctioned up to March 31, 2022.
- By removing the loan size from the equation the central has allowed banks more room to lend to borrowers for high-value properties.
To make home loans cheaper, the Reserve Bank of India on Friday, October 9 said that it will rationalize the risk weights and link them to Loan-to-Value (LTV) ratios for new housing loans sanctioned up to March 31, 2022.
“Recognising the criticality of real estate 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 rationalize 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.
What it means for home loan borrowers
Loan-to-Value (LTV) ratio refers to the proportion of the property value that a lender can borrow through a loan. Lenders set the LTV ratio for a loan applicant after factoring in his credit profile and the regulatory caps for the concerned loan typeset by the regulator. For instance, if a bank underwrites a home purchase of ₹1 crore wherein a home buyer foots ₹20 Lacs and the bank chips in Rs. 80 Lacs. 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 exacerbates, explained Nishant Singh, partner, 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 Lacs but does not exceed ₹75 Lacs, the bank is required to have the capital provision at 50% of the loan value. When the loan amount exceeds ₹75 Lacs, the bank needs the capital provision at 75% of the loan amount.
At present, the risk weights are linked to the size of the loan as well as the loan to value (LTV) ratio. By removing the loan size from the equation the central has allowed banks more room to lend to borrowers for high-value properties.
