The Reserve Bank of India (RBI) on Wednesday made it possible for banks to lend more to home-buyers, and at lower rates, in a move that should benefit customers as well as real estate developers.
The central bank did this by reducing the amount of money banks have to set aside (as security) on home loans. Previously, they had to set aside 0.4% or Rs 400 per lakh. This has now been reduced to 0.25%, or Rs 250 per lakh.
Combined with the cut in the statutory liquidity ratio (the portion of deposits which banks have to invest in government securities) by 50 basis points, or 0.5 percentage point, this means banks now have that much more capital to lend.
The reduction in the amount banks have to set aside (also called a provision) also mean lower home loan rates.
The central bank also reduced the so-called risk weightage on home loans of between Rs 30 lakh and Rs 75 lakh to 35% from 50%, and over Rs 75 lakh to 50% from 75%.
Risk weights are used to calculate the minimum amount of capital that must be held by banks to reduce the risk of insolvency.
This could make bigger home loans less expensive (typically loans above Rs 75 lakh were up to 0.5 percentage points more expensive, in terms of interest than other loans).
“When risk weightage drops it means the banks have that much more money to lend. If it has dropped by one third it means the cost of doing business comes down which makes it possible for banks to then cut interest rate and pass it on to the borrowers,” said Rajeev Ahuja, chief operating officer, RBL Bank Ltd.
The reduction in rates will be higher for bigger ticket size loans which are already more expensive when compared to loans of lower value.
Currently, the interest rate on home loans above Rs 75 lakh is higher. For instance, SBI offer an interest rate of 8.35% for loan amount below Rs 30 lakh while for loan above Rs 75 lakh the interest rate is at 8.65%.
RBI’s decision was prompted by an understanding of the multiplier effect of home loans, according to N.S. Vishwanathan, deputy governor of RBI. His reference is to the fact that an increase in home loans means more home sales, which will benefit real estate developers, and companies in the construction, cement and steel businesses at one end, and companies in the furniture and appliance businesses at another.
“Delinquencies (are) generally among the lowest in home loan segment….It has been decided to reduce risk weight on certain categories on home loans and also the standard asset provisioning,” Vishwanathan added.
According to Vishwanathan, reduction of statutory liquidity ratio (SLR) by 50 basis points will help banks in achieving 100% liquidity coverage ratio by January 2019. These two factors together will bring buoyancy to the home loan segment.
Credit to the housing segment has increased by 13.4% year-on-year at the end of April.
Banks are focusing on affordable housing as demand from other sectors of the economy has dried up and to take advantage of incentives offered by the government to home buyers. Many banks have reduced their home loan rates. The government on 31 December announced the Credit Linked Subsidy Scheme for Middle Income Groups, where interest subsidy of 4% was granted on housing loans of up to Rs 9 lakh and 3% on housing loans of up to Rs 12 lakh.
According to a report by CLSA India Pvt., housing sales could rise from Rs7 trillion in financial year 2017 to Rs17 trillion by fiscal 2024 on the back of market growth and impetus to affordable housing.
“The decision to reduce the risk weights for home loans over Rs. 30 lakh category will release capital for the banking industry and is a positive move,” said Arundhati Bhattacharya, chairman of State bank of India (SBI).
Banks have already been aggressively cutting rates in the home loan segment. SBI, the country’s largest lender, for instance, has already cut its one-year marginal cost of funds based lending rate (MCLR)–the rate linked to its home loans–to 8% currently from 9.20% in April 2016, when MCLR first came into effect.