Risk weights cut on home loans credit negative for banks: Moody’s

Mumbai : The Reserve Bank’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, RBI had reduced the LTV (loan to value) ratios, risk weights and standard asset provisioning rate for individual housing loans on certain category for new customers. “The RBI’s moves 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’s said in a report here on Thursday.

It said this growth i s 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 Rs 75 lakh to 50 per cent from the earlier 75 per cent, while for loans between Rs 30 lakh and Rs 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 per cent 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 overall system bank credit growth to remain muted given banks’ weak balance sheets amid continued asset quality deterioration. As of March 2017, annual bank credit growth was 7.6 per cent, down from 10.2 per cent the previous year.

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