RBI reduce risk weight on home loan will help in lower interest rate

The Reserve Bank of India (RBI) has reduced risk weight on home loans which will help banks in lowering interest rates on home loans below Rs 30 lakh.

RBI governor YV Reddy stated, “Reduction in risk weight-age is an enabling provision and we expect banks to pass on the benefits to the customers.” Now the risk weight on home loans up to Rs 30 lakh will be 50 basis points. Earlier risk weight on home loans up to Rs 20 lakh was 50 basis points and above Rs 20 lakh was 75 basis points.

However banks at the same time have no plans to raise interest rates on bigger home loans in spite of a hike in the cash reserve ratio. “Considering the slowdown in the economy and that interest rates have already peaked, banks may not consider raising lending rates immediately,” said Punjab National Bank’s CMD, KC Chakrabarty. While home loan rates vary from 9.5% to 12% on the floating rate loans.

Keki Mistry, vice-chairman & MD of HDFC — India’s largest home loan lender said, “This is a positive step as property prices have gone up significantly. This will encourage banks that are running tight on capital to extend more home loans.” He pointed out although these guidelines apply to banks, the National Housing Bank, which regulates housing finance companies like HDFC, usually follows RBI’s footsteps.

Currently, several public sector banks are offering lower interest rates on home loans below Rs 20 lakh. However, even as the risk weight has been lowered for loans up to Rs 30 lakh, only loans up to Rs 20 lakh will be eligible for priority sector loans. However RBI has allocated different levels of risk weight for different categories of loans to calculate capital adequacy ratio, which is pegged at 9%. On a loan of Rs 100, if the risk weight is 100%, a bank has to set aside a capital of Rs 9.

Earlier urban co-operative banks (UCBs) were offering home loans up to Rs 25 lakh now RBI has increased the limit to Rs 50 lakh for UCBs. “This will increase the home loan portfolio of UCBs and give them competitive advantage over its peers in the private and public sector. Currently, home loan portfolio accounts for 35% of the loan portfolio and UCB do not have high NPA in this segment,” New India Co-operative Bank’s CEO, DR Shirodkar. Although limit has been increased but it will be subject to certain conditions which are yet to be finalized.