RBI links risk weight on home loans to loan-to-value ratio

Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.

In the near future co-operative banks will find much easier to extend home loans if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has coupled the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.

Therefore for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will be required to set aside only 50% of the capital which they were required to maintain earlier.

In case the loan amount exceeds Rs 30 lakh in absolute terms but is still less than 75% of the property value, the capital requirement will be 75% of standard requirement. But there is no relief in capital adequacy requirement, if the bank provides loans for more than 75% of the value of the property.

The amount of capital banks are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank.

Capital adequacy ratio is the ratio of a bank’s net worth to its risk-weighted credit exposure. The risk weight age, in turn, is the ratio which determines the credit risk in a particular loan asset.

However capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weight age for loans in certain segments. For instance, for home loans up to Rs 30 lakh, the risk weight age on the loan is 50%. Hence banks will be required to set aside only 50% of the capital they keep aside for loans with a 100% risk weight age.

RBI increases or reduces the risk weight age depending on its observation of risk in a particular segment. Banks are able to reduce loss with the higher risk weight age in the event of a default. Banks also discourage lending in such segments by making it more capital intensive.

The central bank has made norms easier for branch and ATM licensing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. There is one more condition for the co-operative banks that they need to have net NPAs of less than 10% and should have made a profit in the preceding year.