Home Loan Breather as Banks favour lower risk weight

In the present times of rising inflation and wild speculation as to further home loan hikes during this year, the RBI has been keen to curb credit growth in the economy in overheated sectors like real estate. The latest development in the area of home loans is that Banks, except State Bank of India and Bank of Baroda, are likely to raise rates by a lower margin on home loans, as a 25-50 basis points gain from lower risk weight for capital allocation is quite worth it.

Those Public Sector Banks that did not raise interest rates on home loans since January, are highly likely to pass on the benefit of lower capital requirement on loans up to Rs 20 lakh to home loan borrowers. Oriental Bank of Commerce said it will raise home loan rates somewhere around 50 to 75 basis points for new borrowers seeking loan up to Rs 20 lakh.

However, one can expect that the increase in interest rates on loans above Rs 20 lakh will be much sharper as Public Sector Banks are contemplating up to 50 basis points increase in interest on loans up to Rs 20 lakh and 100 basis points or more on loans above Rs 20 lakh.

This will have some serious implications on the quantum of monthly payments, where equated monthly instalments (EMI) are bound to rise. There has been a feeling for quite sometime that home loan rates might shoot up by 50 basis points (0.5%), which also means that borrowers’ equated monthly instalments could well rise.

It has transpired in the meetings that those Banks which have already raised rates in the last two months, should not increase again and those who had not raised it, the increase should be lower.

The RBI has lowered the risk weight on home loans up to Rs 20 lakh to 50 per cent from 75 per cent for a year. This would help to relax one-third of the capital allocated for Banks’ loan portfolios of up to Rs 20 lakh.

A lower risk weight will lead to Banks setting aside less capital for every rupee they lend. They can provide relief to people taking housing loans below Rs 20 lakh by re-pricing/reworking their rates. The idea is that benefits of reduction should be passed on to the borrowers.

Banks this way can lend more by making lower loan provisions. This measure is part of prudential regulations to ensure Banks are adequately covered when loans turn awfully bad.

A 25 basis-point cut in interest rates means a direct saving of Rs 166 per month in equated monthly instalments (EMIs) on an Rs 10 lakh loan taken for a period of 20 years. Hundred basis points equal one percentage point.

The percentage of borrowers who seek home loans of up to Rs 20 lakh is roughly between 65 and 85 per cent, depending on the bank. T he number for private and foreign Banks is far less in this category than their public sector counterparts.

The reduction would be reviewed based on default experience in home loan portfolios of Banks.

There is a great possibility that Public Sector Banks will opt for a graded pricing of home loans depending on the loan amount. Banks such as Corporation Bank and Bank of India are cases in point. They already charge higher for housing loans above Rs 20 lakh.

While Bank of Baroda will not be lowering rates for small borrowers, State Bank of India is yet to decide. The bank may stick to the same rates as of now and not raise rates for small borrowers next time around as the bank had spared home loans up to Rs 15 lakh in its January hike.

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