Home loans over Rs 75 lakh set to get dearer as risk weight rises again - Business News: Latest Share Market , Economy & Finance News | Trendmergers

Breaking

Post Top Ad

Post Top Ad

Home loans over Rs 75 lakh set to get dearer as risk weight rises again

 Home loans over Rs 75 lakh set to get dearer as risk weight rises again

Home loans over Rs 75 lakh set to get dearer as risk weight rises again


The Reserve Bank of India (RBI) has decided to increase the risk weightage on home loans above Rs 75 lakh, resulting in higher provisioning for banks and making these loans more expensive for borrowers. The move aims to promote financial stability and prevent banks from taking excessive risks in the real estate sector.


Background on RBI’s risk weightage policy


The RBI assigns risk weights to different types of loans based on the perceived riskiness of the borrower and the underlying collateral. This risk weightage determines the number of capital banks must set aside to cover potential losses on these loans. Higher risk weightage means banks must hold more capital, reducing their lending capacity.


In 2018, the RBI reduced the risk weightage on home loans from up to Rs 75 lakh to 35% from 50%. This was done to boost lending to the affordable housing segment and support the government’s goal of ‘Housing for All by 2022’. However, the central bank had maintained the risk weightage of 75% for home loans above Rs 75 lakh.


Why is the risk weightage being raised again?


The RBI’s decision to increase the risk weightage on home loans above Rs 75 lakh to 50% is in line with its cautious approach towards the real estate sector, which has been a cause for concern in the past due to excessive lending and high default rates.


The central bank has noted that the residential real estate sector is vulnerable to shocks due to its interconnectedness with other sectors, such as banking and construction. Moreover, the pandemic has added to the stress in the sector, with sales and prices declining in many cities.


Impact on banks and borrowers


The increase in risk weightage will result in higher provisioning for banks, impacting their profitability. This could also lead to higher interest rates on home loans above Rs 75 lakh, making them more expensive for borrowers.


However, experts believe that the impact on borrowers will be limited, as the number of home loans above Rs 75 lakh is relatively small. According to data from the RBI, home loans above Rs 75 lakh account for less than 5% of banks' total home loan portfolio.


Conclusion


The RBI’s decision to increase the risk weightage on home loans above Rs 75 lakh is a prudential measure to promote financial stability and prevent banks from taking excessive risks in the real estate sector. While this could result in higher provisioning for banks and higher interest rates for borrowers, the impact is expected to be limited due to the small size of this segment of the home loan market.


Post Top Ad