Banks now have an incentive to lower interest rates on loans for prospective home buyers below Rs 30 lakh as the Reserve Bank of India has reduced risk weight on such loans. According to RBI governor YV Reddy a reduction in risk weight age is an enabling provision and the apex bank expect banks to pass on the benefits to the customers.
But at the same time, banks are not planning to raise interest rates on bigger loan amount despite a hike in the cash reserve ratio. Considering the slowdown in the global economy and that interest rates have already peaked, banks may not consider raising lending rates all of a sudden.
Home loan rates in India vary from 9.5% to 12% on the floating rate loans. Risk weight on housing finance up to Rs 30 lakh will now be 50 basis points. Earlier risk weight on these loan plans up to Rs 20 lakh was 50 basis points and above Rs 20 lakh was 75 basis points. This is definitely a positive step as property prices have gone up significantly. This will encourage both public and private sector banks that are running tight on capital to extend more home loans. Although these guidelines apply to all banks operating in the home loan segment, the National Housing Bank, which regulates housing finance companies like HDFC, usually follows RBIs footsteps.
Currently, several public sector banks have cut down
interest rates on home loans below Rs 20 lakh. However, even as the risk weight is lower for loans up to Rs 30 lakh, only loans up to Rs 20 lakh are now eligible for priority sector loans. RBI has allocated different levels of risk weight for different loan plans to calculate capital adequacy ratio, which is pegged at 9%. For example, on a loan of Rs 100, if the risk weight is 100%, a bank has to set aside a capital of Rs 9.
Moreover, RBI has allowed urban co-operative banks (UCBs) and non banking financial institutions to offer home loans up to Rs 50 lakh against an earlier limit of Rs 25 lakh. This guideline will increase the home loan portfolio of UCBs and give them competitive advantage over its peers in the private and public sector. Currently,
housing finance portfolio accounts for 35% of the loan portfolio and UCB do not have high non performing asset in this segment. However, the hike in the limit of the loan amount will be subject to certain conditions that are yet to announced.
