RBI tightens norms for home loans, rates may go up

November 2nd, 2010 - 5:50 pm ICT by IANS  

State Bank of India Mumbai, Nov 2 (IANS) The Reserve Bank of India (RBI) Tuesday tightened the norms for home loans, asking banks to cap the loan amount at 80 percent of the cost of the house to check possible defaults and prevent an asset bubble.

“In order to prevent excessive leveraging, it is proposed that the loan to value (LTV) ratio in respect of housing loans hereafter should not exceed 80 percent,” said Governor D. Subbarao in the central bank’s second quarter review of monetary policy for this fiscal.

He said “asset prices in India, as in many other emerging economies have risen sharply in a short time which is a cause for concern.”

Loan to value ratio is used to determine how much of a property can be financed. At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks’ housing loan exposures.

Also, the RBI increased the provision that banks need to set aside to shield them from home loan defaults.

For home loans upto Rs.30 lakh and where the disbursal is till 75 percent of the loan amount, banks are required to set aside up to 50 percent of the loan as provision in case of default.

But the for disbursal more than 75 percent, the central bank asked all banks to set aside 125 percent of the home loan as provision against default. This provision was earlier at 100 percent of the loan.

The RBI also sought to discourage banks from aggressively selling “teaser loans”, which are a big hit with people who want to buy houses.

Teaser loans have an adjustable-rate of interest in which the borrower pays a low interest rate during the initial years of the loan. The rate of interest then increases after a few years. These loans generally offer fixed interest rates in the initial years which later on convert to a floating one.

The RBI, which had earlier frowned upon teaser loans, said: “This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.”

“In view of the higher risk associated with such loans, it is proposed to increase the standard asset provisioning by commercial banks for all such loans to 2 percent,” said Subbarao in the review.

Banking chief executives, who were present at the Reserve Bank of India, said the increase in provisions could lead to an increase in home loan rates.

“It could lead to a increase in 5-10 basis points,” State Bank of India Chairman O.P. Bhatt told reporters, adding that such loans were introduced last year because credit offtake was low and banks had surplus liquidity.

The country’s largest private lender, ICICI Bank’s Chief Eexecutive Chanda Kochhar said such loans formed only “a very small part of the portfolio especially for banks with a large asset base.” Still, she expected “some amount of upward bias in the interest rates” in the near future.

The RBI Tuesday hiked both its short-term borrowing and lending rates by 25 basis points each. The repurchase rate now stands revised to 6.25 percent from 6 percent, while the reverse repurchase rate has been hiked to 5.25 percent from 5 percent in the sixth such interest rate tweak this year.

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