RBI's move to cut risk weight, provisioning for home loans credit negative for banks: Moody's

Mumbai: The Reserve Bank of India's (RBI) decision to lower the risk weights and standard asset provisioning on select housing loan sizes is credit negative for Indian banks, global credit rating agency Moody's Investors Service said on Thursday.

Reserve Bank of India. Reuters

Reserve Bank of India. Reuters

In its credit outlook report, Moody's said: "The RBI's moves are credit-negative for Indian banks because lower capital requirements will weaken banks' protection from the housing sector, which has grown rapidly in recent years, and will encourage greater lending."

"This growth is occurring as non-bank finance companies increasingly target the home-loan segment, posing greater downside risk if there is a correction in property prices," Moody's added.

The RBI's notification affects the risk weights of newly originated housing loans in two main categories.

For housing loans totaling more than Rs 7.5 million, the risk weights will fall to 50 percent from 75 percent, while for housing loans of Rs 3 million to Rs 7.5 million, the risk weights will decline to 35 percent from 50 percent.

At the same time, the RBI is removing the previous distinction of risk weights based on loan-to-value ratios for loans in the same category, Moody's said.

RBI also has lowered the standard asset provisioning requirement to 25 basis points from 40.

According to Moody's, over the next 12-18 months, the overall system credit growth will remain muted given banks' weak balance sheets amid continued asset quality deterioration.

"At the end of March 2017, annual bank credit growth was 7.6 percent, down from 10.2 percent the previous year. Although lower risk weights would boost sluggish credit growth while limiting the effect on banks' capital position, we believe competition for housing loans has significantly increased among banks and non-bank finance companies," Moody's said.

According to Moody's, asset quality performance in the housing loan segment has remained fairly stable, although banks have confirmed that some areas of weaknesses have emerged in the luxury property segment following the Indian government's demonetisation in November 2016.

Updated Date: Jun 16, 2017 11:03 AM

Also Watch

Social Media Star: Abhishek Bachchan, Varun Grover reveal how they handle selfies, trolls and broccoli
  • Monday, July 16, 2018 It's a Wrap: Soorma star Diljit Dosanjh and Hockey legend Sandeep Singh in conversation with Parul Sharma
  • Monday, July 16, 2018 Watch: Dalit man in Uttar Pradesh defies decades of prejudice by taking out baraat in Thakur-dominated Nizampur village
  • Monday, July 16, 2018 India's water crisis: After govt apathy, Odisha farmer carves out 3-km canal from hills to tackle scarcity in village
  • Sunday, July 15, 2018 Maurizio Sarri, named as new Chelsea manager, is owner Roman Abramovich's latest gamble in quest for 'perfect football'

Also See