RBI may not have cut policy rate but new home loans set to get cheaper; here's why

The Reserve Bank of India did not cut its key policy rate -- repo rate -- on Wednesday but has made policy changes that ensure new home loans will become cheaper.

The expectation of cheaper home loan is because the RBI has reduced the standard assets provisions on individual housing loans to 0.25 percent and also lowered the risk weights on such lending.



"As a countercyclical measure, the LTV (loan to value) ratios, risk weights and standard asset provisioning rate for individual housing loans" have been reviewed from today, the RBI said in the second bi-monthly policy statement.

The standard asset provisions, or the amount of money to be set aside for every loan made, has been lowered to 0.25 percent from the earlier 0.40 percent, which will help reduce the interest rates on home loans.

It also eased the risk weights for certain categories of loans, which will help banks on the capital adequacy front, and enable them to make more loans.

The risk weight for individual housing loans above Rs 75 lakh has been reduced to 50 percent from the earlier 75 percent, while for loans between Rs 30 and Rs 75 lakh, a single LTV ratio slab of up to 80 percent has been introduced with a risk weight of 35 percent.

RBI Governor Urjit Patel explained that this is a part of the central bank and the government attempts of "targeted interventions" to help prop-up the sagging growth numbers.

The central bank also cut statutory liquidity ratio (SLR) for banks to 20 percent. The SLR is the proportion of deposits banks need to invest in government securities gold.

Reacting to the RBI's measures, bankers said the home loan rates are bound to fall.

According to Bank of India MD Dinabandhu Mohapatra, the reduction in statutory liquidity ratio by 50 basis points effective June 24 will facilitate banks to meet the LCR requirement of 100 percent comfortably by 1 January 2019.

However, this measure will not have an impact on credit offtake as banks are already in a situation of excess SLR in spite of sluggish credit growth at 5.7 percent, he said.

"The reduction in risk weights and standard asset provisioning on certain categories of housing loans will lower housing loan rates and increase housing loan portfolio of banks," he said.

"Reduction in the risk weights on certain categories of the housing loans is indeed a positive signal. Since retail loans are only showing signs of growth and housing loan segment, which is the major sector of retail, reduction in LTV ratio, risk weights and standard assets provisioning would spur up growth in this segment," Central Bank of India Chairman Rajeev Rishi said.

Welcoming the decision of RBI, ICICI Bank MD and CEO Chanda Kochhar said the SLR cut and reduction in risk weights for housing loans are positive moves that will support bank liquidity and encourage growth in housing loans.

According to Govind Sankaranarayanan, Chief Operating Officer Tata Capital, the decision to reduce the risk weight on housing finance for properties Rs 30-75 lakh should help reduce the burden borne by financers through capital costs and lay the platform for a rate cut in the future.

Real estate developers, meanwhile, hailed the RBI's move.

"While RBI has kept the repo rate unchanged, we welcome their move of softening risk weight on home loans. This measure along with lowered inflation figures as per earlier projection will definitely augur well for the growth of the real-estate sector," CREDAI President Jaxay Shah said.

Anshuman Magazine, Chairman India and South East Asia, CBRE, said the reduction in the SLR would help provide more liquidity to banks.

"This could prove beneficial for prospective home buyers with the expectation that lending institutions could further lower the interest rates on loans," he added.

SARE Homes MD Vineet Relia said: "Even though RBI has left repo rate untouched, home loan rates are anticipated to come down if one were to go by the present trend. A slight reduction in SLR is also expected to have a favourable impact on home loan rates."

With inputs from PTI

Updated Date: Jun 08, 2017 08:45 AM

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