To give the housing sector a leg up and revive the slowing economy, banks want the risk weights on home loans lowered.
An Indian Banks’ Association committee on housing has told the Finance Ministry that if the prescribed risk weights on home loans are lowered, banks will have more funds to lend.
This move will not only encourage banks to lend at softer interest rates but also enable them to give loans up to 85 per cent (against 75 per cent now) of the value of a house.
If the risk weight on a class of assets (or loans) is high, banks have to back them up with more regulatory capital to take care of possible delinquencies. This leads them to either charge borrowers higher interest rates or limit their exposure to such assets.
HIGHER LTV
The committee said that for 85 per cent loan-to-value (LTV) ratio (the amount of loan given by a bank divided by the value of property) and a Rs 35-lakh home loan, the risk weight should be 50 per cent.
Currently, for 75 per cent LTV and a Rs 30-lakh loan, the risk weight is 50 per cent.
In the case of home loans above Rs 35 lakh and below Rs 75 lakh (current loan bracket: Rs 30 lakh and below Rs 75 lakh), the committee wants the risk weight lowered to 50 per cent (now 75 per cent).
For loans between Rs 75 lakh and up to Rs 1 crore (Rs 75 lakh and above), the recommended risk weight is 75 per cent (125 per cent).
The IBA committee has suggested 100 per cent risk weight for home loans above Rs 1 crore.
“The proposed revised cut-off at 85 per cent LTV (excluding stamp duty, registration charges, value-added tax and other documentation charges) coupled with the reduction in risk weights will help banks lower the interest rate on housing projects,” said a banker. The real estate sector can be an engine of growth for the economy as it will create demand for a host of products, including iron and steel, cement, sanitary ware, electric cables, etc.
PPP PROJECTS
The committee recommended that public-private partnership projects (residential) undertaken by real estate developers in partnership with the Government (Central/ State) and its agencies may be considered for preferential terms, reduced risk weights and rates of interest.
Further, where land is purchased in an auction/ bidding from Government/ municipal authorities, finance given by banks for the project could include the land cost.
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