The Reserve Bank of India (RBI) has officially come up with a move that will considerably enhance bank lending for the Indian real estate sector, one of the most vital industries for countrywide economic recovery. Indian real estate has a huge role to play in generating employment while possessing ample inter-linkages with other business sectors.
LTV on housing loans to benefit real estate sector
For scaling up overall flow of credit to Indian real estate, the RBI (Reserve Bank of India) has fully rationalized overall risk weightage on the LTV ratio for housing loan or the loan to value ratio. This will apply for all new home loans that are sanctioned till the 31st of March, 2022. Based on the latest RBI notification, new home loans will have 35% of risk weightage and LTV will be lower than 80% in this case. Risk weightage will go up to 50% whenever LTV exceeds 80% but remains within 90% overall.
This will impact several parameters including the lending rate or bank lending rate for the real estate sector along with the prime lending rate as well. This will enable higher lending to the realty sector from banks which is vital for nationwide economic revival, owing to the role played by this industry in generating employment and its links with other business sectors. Tanuj Shori CEO at Square Yards, India’s biggest real estate platform, Tanuj Shori, opined that the decision to link risk weightage solely to the loan to value (LTV) ratio as compared to the previous system of linking risk weightage with both LTV and pricing will benefit real estate. Shori stated that this will mostly benefit high-end and luxury real estate units which have already been grappling with a major slump in demand.
The RBI notification has already made it clear that risk weight rationalization will take place, irrespective of the final amount. The requirement of 0.25% of standard asset provision will be applicable for all such loans as well. Other experts have stated that LTV ratio is usually worked out by division of the borrowed amount by the property value in terms of a percentage.
For example, if a home has a final price of Rs. 50 lakh and the down payment is Rs. 5 lakh, then the borrowed amount will be Rs. 45 lakh. Risk weightage given to the LTV will free up capital in banks for extra lending. It will also help them lower the overall rates of lending since they will have spare lending capital in hand. Getting home loans sanctioned at more attractive rates of interest will thus be possible since banks will have more funds to lend for housing loans.
Published Date: 16 October 2020
