IBA Committee: Risk Weights on Housing Loans Lowered, Banks Will Have More Funds to Lend..!

To give the housing sector a leg up & revive the slowing economy, banks want the risk weights

on housing loans lowered.

An IBA (Indian Banks’ Association) committee on housing has told the Finance Ministry that if the prescribed risk weights on housing loans are lowered, banks will have more funds to lend. This move will not only encourage banks to lend at softer interest rates but also enable them to give loans up to 85% (Against 75% now) of the value of a house.

If the risk weight on a class of assets (or / home loans) is high, banks have to back them up with more regulatory capital to take care of possible delinquencies. This leads them to either charge borrowers higher interest rates or limit their exposure to such assets.

Higher  loan-to-value..!

The committee said that for 85% loan-to-value (LTV) ratio (The amount of housnig loan given by a bank divided by the value of property) and a Rs. 35.lakh housing loan, the risk weight should be 50%.

Now, for 75% LTV and a Rs. 30 lakh loan, the risk weight is 50%.

In the case of hosuing loans above Rs. 35 lakh & below Rs. 75 lakh (current loan bracket: Rs. 30 lakh & below Rs. 75 lakh), the committee wants the risk weight lowered to 50% (Currently 75%).

For loans between Rs. 75 lakh & up to Rs. 1 crore (Rs. 75 lakh & above), the recommended risk weight is 75% (125%).

The IBA committee has suggested 100% risk weight for hosuing loans above Rs. 1 crore.

The proposed revised cut-off at 85 % LTV (excluding stamp duty, registration charges, VAT (value-added tax) and other documentation charges) coupled with the reduction in risk weights will help banks lower the interest rate on housing projects.

The Indian real estate sector can be an engine of growth for the economy as it will create demand for a host of products, including iron & steel, cement, sanitary ware, electric cables, etc.

Public Private Partnership Projects

The committee recommended that public-private partnership (PPP) projects (residential) undertaken by real estate developers in partnership with the Government (Central / or  State) & its agencies may be considered for preferential terms, reduced risk weights & rates of interest. Further, where plot of land is purchased in an auction / or  bidding from Government /  municipal authorities, finance given by banks for the project could include the plot of land cost.

Src: The Hindu

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