With the view to help the banking sector extend small ticket home loans at cheaper rates RBI is expected to relax risk norms on home loans up to Rs 20 lakh. This move is likely to induce banks to reduce home loan interest rates by up to 3%.
Chairman and Managing Director of UCO Bank, SK Goyal said, "We have decided to bring down interest rates for loans up to Rs 20 lakh by 200 basis points while loans up to Rs 5 lakh would be cheaper by 300 basis points."
Even Oriental Bank of Commerce (OBC) and Bank of India are likely to reduce the rates soon. The interest rates for home loans up to Rs 20 lakh after the reduction are expected to lie in the range of 8% to 10%.
RBI is likely to lower risk weights assigned to home loans up to Rs 20 lakhs. Credit risk between 0% and 100% has to be assigned by banks to all their assets and based on the risk weight banks have to keep aside a certain amount of capital. If the risk weight is low, banks are able to reduce the minimum capital requirement and extend more loans. The minimum money that is set aside is called the capital adequacy ratio (CAR). Currently this ratio is set at 9%.
A relaxation on risk weight would enable banks to reduce the interest rate charged on their home loans because it will allow them to keep aside smaller amount of capital to shield the defaults. The risk weights assigned to different category of loans differ. "In case of housing loans, at present, RBI prescribes a risk of 75%. We expect that the central bank may reduce this to 50% for loans up to Rs 20 lakh," said OBC executive director SC Sinha.
In fact government official informed that banks are also likely to reduce the margin money charged for home loans up to Rs 20 lakh. Currently banks are demanding margin money between 20% and 25% of the house's value. A relaxation of 5% is expected in this front which would thereby facilitate the borrower to bring a smaller percentage as margin money.
Recently banks have raised their requirement of margin money in order to lower the troubles arising due to liquidity crunch. An official from the finance ministry said, "The finance ministry and RBI have taken enough steps to ease liquidity conditions in the market...In such a situation, it is desirable that banks should bring down the margin requirement. However, the final decision rests with individual banks."
Small ticket housing loans have also been considered as a focus area in the fiscal stimulus package announced by the government. Housing loans up to Rs 20 lakh are given the status of priority sector lending and even public sector banks are expected to declare a package for home loans in this range.
Nearly 80% home loans in India are below Rs 20 lakh.