RBI issues Guidelines to Banks for Rationalisation of Risk on Housing Loans

The Reserve Bank of India on 16th October 2020 issued notification with respect to Individual Housing Loans - Rationalisation of Risk Weights to all Scheduled Commercial Banks (Including Small Finance Banks, but Excluding Local Area Banks and Regional Rural Banks).

It referred to paragraph 6 of the Statement on Developmental and Regulatory Policies dated October 9, 2020 on rationalization of risk weights on Individual Housing Loans. Para 6 is related to terms of the extant regulations on capital charge for credit risk of individual housing loans by banks, differential risk weights which are applicable based on the size of the loan as well as the loan to value ratio (LTV).

The RBI after recognizing the criticality of real estate sector in the economic recovery, given its role in employment generation and the interlinkages with other industries has decided, as a countercyclical measure, to rationalise the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022.

In terms of circular passed, dated June 7, 2017, the capital charge for claims secured by residential property falling under the category of individual housing loans is assigned differential risk weights based on the size of the loan as well as the loan to value ratio (LTV). As a counter cyclical measure, it came up with rationalise the risk weights, irrespective of the amount.

The risk weights for all new housing loans to be sanctioned on or after the date of as per this circular is upto March 31, 2022. Further the requirement of standard asset provision of 0.25% shall continue to apply on all such loans.

The LTV ratios, Risk Weights and Standard Asset Provision for all loans sanctioned prior to the date of this circular shall continue to be as prescribed in terms of the circular dated June 7, 2017.

It also clarified that all other instructions applicable in terms of the circular dated June 7, 2017 shall remain unchanged.