To scale up overall credit flow towards the Indian real estate industry, the RBI (Reserve Bank of India) has rationalized LTV (loan to value) ratio risk weightage for new home loans that have been sanctioned till the 31st of March, 2022. Based on the RBI notification that has been issued, new home loans will come with 35% of risk weight and LTV is lower than 80%. Risk weight will stand at 50% when the LTV is higher than 80% but lower than 90%.
The notification also states that risk weights will be rationalized irrespective of the final amount. The 0.25% standard asset provision will be applicable for all loans. This will enable higher lending for Indian real estate which is vital for spurring economic revival owing to the sector’s role in generating employment and its links with several other business sectors. Experts have stated that the calculation of the LTV ratio is done by dividing the borrowed amount by the property value as a percentage.
The risk weightage linked to the LTV will free up more capital at banks for extra lending. It will also help in lowering rates of lending since spare capital will be available for lending. Since there will be additional capital in hand for banks, they will be offering home loans to borrowers at more attractive rates of interest. The CEO at Square Yards, Tanuj Shori, stated that linking risk weightage solely to the LTV as compared to the previous system of linking it with both LTV and pricing, will boost the real estate industry. This will majorly benefit luxurious and high-end real estate properties which have been grappling with considerable downward movements in terms of demand.
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Published Date: 19 October 2020
