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.
In the second bi-monthly monetary policy review announced on June 7, that 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.
“The RBI’s move 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,” global rating agency Moody said in a report.
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The report stated that the growth was occurring as non-bank finance companies increasingly target the home-loan segment, posing greater downside risk if there is a correction in property prices.
RBI lowered the risk weight for housing loans above 75 lakh to 50 percent from the earlier 75 per cent, while for loans between 30 lakh and 75 lakh, 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 loan was lowered to 0.25 percent from the earlier 0.40 per cent.
The RBI also removed the previous distinction of risk weights based on loan-to-value ratios for loans in the same category.
Over the next 12-18 months, the rating agency expects the overall system bank credit growth to remain muted, given bank’s weak balance sheets amid continued asset quality deterioration.
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As of March 2017, annual bank credit growth was 7.6 percent, down from 10.2 percent in the previous year.
The report also talked about the fact that although lower risk weight would boost sluggish credit growth while limiting the effect on banks’ capital position, it believes that competition for housing loans has significantly increased among banks and non-bank finance companies.
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 on March 2017, bank credit grew at 7.6 per cent, whereas the home loan segment witnessed 15.2 per cent growth.
Source: Business Standard
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