In order to check the flow of easy credit into housing sector and a possible asset bubble, the Reserve Bank of India (RBI) on Tuesday said that banks cannot offer more than 80 per cent of the value of a property, also called loan to value ratio (LTV) as housing loan. At present, there is no ceiling on LTV with some banks offering up to 85 per cent of the cost of the house as loan. The move is to prevent excessive leveraging.
The RBI move is a step in the right direction. The RBI is trying to counter runaway property prices and ensure that buying a house remains affordable for the middle-income group.
There is a tendency among borrowers to borrow as much as possible and the move by RBI would curb this practice. If you pay only 10-15 per cent of the cost of a house from your own pocket and borrow rest from banks, the affinity towards the property you purchased would be less. This may lead to higher default rates. The move may also reduce the pace and quantum of housing loan disbursements.
The central bank also raised the risk weight for residential housing loans of Rs 75 lakh and above, irrespective of the LTV, to 125 per cent. At present, the risk weight on residential housing loans with LTV up to 75 per cent are 50 per cent for loans up to Rs 30 lakh and 75 per cent for loans above that amount. In case the LTV is more than 75 per cent, the risk weight of all housing loans, irrespective of the amount of loan, is 100 per cent.
In another move that may hit housing loan uptake, the RBI increased the standard asset provisioning on teaser loan rate to 2 per cent. "This will make teaser loans costly," Jain said. Under teaser loans, housing loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates. RBI observed that this practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.
"It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates," RBI said.
The directives on higher risk weightages, lower loan-to-value ratios and higher provisioning for teaser loans will surely have some dampening effect on the real estate sector, but will settle down soon and enable a more orderly growth of the sector.
RBI steps would definitely help cool down the overpriced assets, check the speculation in the real estate market and secure the banks against NPA's.
