Rationalization of Risk Weights on Home Loans

Rationalization of Risk Weights on Home Loans


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The Reserve Bank of India (RBI) has announced its major decision to rationalise the risk weights and link them to the loan-to-value (LTV) ratios for all new housing loans sanctioned up to March 31, 2022. The declaration was made by Governor Shaktikanta Das during his speech on the bi-monthly Monetary Policy Committee (MPC) announcement.   What does it state?

  1. Under the current regulations, differential risk weights are applicable to individual housing loans, based on the size of the loan as well as the loan-to-value ratio (LTV).
  2. The Governor added that the decision was taken in recognition of the role of the real estate sector in generating employment and economic activity and this move will likely give a fillip to the real estate sector.

How this benefits potential home buyers?

  • The decision will positively impact the potential home buyers seeking loans as the amount of loan that will be extended is expected to go up, now.
  • For new housing loans, banks are being encouraged by the RBI. The banks will find it easy to extend loans on big and small houses.
  • The loan-to-value ratio will determine the risk weight on home loans instead of the size of loans. LTV means the amount of loan that a bank can give on the valuation of the property. If the risk weights rise, the banks are required to make higher provisions and thus their ability to lend gets restricted.
  • At 80 per cent LTV, the applicable risk weightage will be 35 per cent. If the LTV is between 81 per cent and 90 per cent, the applicable risk weightage will be 50 per cent and this will be applicable to all new loans sanctioned till 31.3.2022.

Reserve Bank of India, has kept the repo rate unchanged on 4 per cent, as speculated by most analysts and experts. It also maintained the accommodative stance while keeping the MCLR and repo rates unchanged too. Addressing the media, RBI governor Shaktikanta Das said that the central bank will keep its accommodative stance at least for this financial year and more, till economic stability is achieved.

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