[ecis2016.org] The Reserve Bank of India’s recent move, to reduce risk weights and standard asset provisioning on individual housing loans, are credit negative for the banking sector, says a report by Moody’s
The Reserve Bank of India’s (RBI’s) move, to reduce risk weights and standard asset provisioning on individual housing loans, are credit negative for banks, because lower capital requirements will weaken banks’ protection from the housing sector, which has grown rapidly in recent years and will encourage greater lending, says a report by global rating agency Moody’s.
You are reading: Risk weights cut will weaken banks’ protection from the housing sector: Moody’s
It said this growth is occurring, as non-bank finance companies increasingly target the home-loan segment, posing greater downside risk if there is a correction in property prices.
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In the second bi-monthly monetary policy review on June 7, 2017, the RBI had reduced the LTV (loan to value) ratios, risk weights and standard asset provisioning rate for individual housing loans on certain categories, for new customers.
[ecis2016.org] Impact analysis of RBI’s relaxation of risk weightage norms for home loans
The RBI lowered the risk weight for housing loans above Rs 75 lakhs to 50 per cent from the earlier 75 per cent, while for loans between Rs 30 lakhs and Rs 75 lakhs, the risk weights were cut to 35 per cent from 50 per cent. The standard asset provisions, or the amount of money to be set aside for every loan given, on home loans, was lowered to 0.25 per cent from the earlier 0.40 per cent. The RBI also removed the previous distinction of risk weights, based on LTV ratios, for loans in the same category.
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Over the next 12-18 months, the rating agency expects overall bank credit growth to remain muted, given banks’ weak balance sheets, amid continued asset quality deterioration. As of March 2017, the annual bank credit growth was 7.6 per cent, down from 10.2 per cent in the previous year. “Although lower risk weights would boost sluggish credit growth, while limiting the effect on banks’ capital position, we believe competition for housing loans has significantly increased among banks and non-bank finance companies,” the report said.
Since 2015, housing loan growth has been roughly double that of overall bank credit. In 2015, overall bank credit growth was 7.8 per cent, while housing credit was at 16.7 per cent. In the year ended March 2017, bank credit grew at 7.6 per cent, whereas the home loan segment witnessed a 15.2 per cent growth.
Source: https://ecis2016.org/.
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