Date:25/04/2007 URL: http://www.thehindubusinessline.com/2007/04/25/stories/2007042503960600.htm

Back Risk weight on home loans trimmed to 50%

Our Bureau

Advances up to Rs 20 lakh may be spared rate hike burden

THE GUV AND HIS TEAM: The RBI Governor Dr Y.V. Reddy; and his deputies (from left) Ms Usha Thorat; Mr V. Leeladhar; Dr. Rakesh Mohan; and Ms Shyamala, Gopinath, at a press conference to announce the Credit Policy in Mumbai on Tuesday. - Shashi Ashiwal

Mumbai April 24 The RBI has reduced the risk weight on residential housing loans to individuals from the existing 75 per cent to 50 per cent. Bankers see it as an encouragement to offer housing loans up to Rs 20 lakh. Bankers also expect interest rates on this category of loans will not be hiked further.

"This dispensation will be applicable for loans up to Rs 20 lakh and will be reviewed after one year, keeping in view the default experience and other relevant factors," said RBI's Annual Credit Policy.

"It is an encouragement to the housing sector; now banks have an incentive to offer small value housing loans to their customers," said Mr Sangeet Shukla, Chief General Manager, State Bank of India.

According to senior bankers, this move was expected as the Finance Minister had also asked PSU bank chiefs in a recent meeting at Delhi to offer more small value loans (up to Rs 20 lakh) without marking up their cost.

"This move has possibly reduced the pressure on banks and may encourage them to keep interest rates unchanged in this category of loans," said a senior official at UTI Bank.

The RBI has reasoned: "Under the standardised approach for credit risk under Basel II which is being implemented as per the schedule already indicated, the risk weight on residential property fully secured by mortgages is prescribed at 35 per cent, subject to fulfilment of strict prudential criteria."

The RBI has also said risk weight on loans up to Rs 1 lakh against gold and silver ornaments has been reduced to 50 per cent from the existing level of 125 per cent for all categories of banks.

Loans against gold and silver ornaments are mostly availed by the poorer sections of the society in rural and urban areas.

These loans entail relatively low risk as they are extended with adequate margins and the collateral (gold or silver) is easily marketable, particularly where the size of the loan is small, said the RBI statement.

"It will be easier for banks to lend against the gold and silver as the risk weightage has been reduced. So, now the banks do not have to provide extra capital for these loans. These are mostly secured loans used by lower income group," a senior bank official said.

"The reduction in risk weightages for housing loans is a temporary measure to ensure that banks continue to lend to this segment and thus is a welcome move. Similarly loans up to Rs 1 lakh against gold and silver ornaments also attracts lower risk weightages. These measures will prepare the ground for the system as it moves into a Basle II environment, where collateralised loans merit lower risk weightages," said Mr Gautam Vir, MD and CEO, Development Credit Bank.