How rationalization of risk weights and co-lending model will help borrowers

The RBI in its October monetary policy review has kept the policy rates unchanged but announced a few other steps that may bring the borrowing cost down. Keeping other previous cuts and measures into account, the cost of funds of banks already seems to be coming down. Several banks have cut their MCLR over the previous few weeks. “Even though the apex bank has kept the rates unchanged, we still believe that there is room for financial institutions to cut down on their lending rates for their customers. During lockdown, the RBI reduced the repo rate which failed to bring cheer to the market, however, the rates today might help smoothen the economy to some extent and the benefits of which are yet to be fully passed on to the customers,” says Amit Modi, Director, ABA Corp & President (Elect) CREDAI Western UP.

The RBI has taken two key steps. One, the risk weightage for banks has been modified, and secondly, the co-origination of loans for NBFCs and HFCs has been allowed.

Risk-weightage of loans

In terms of the regulations on capital charge for credit risk of individual housing loans by banks, differential risk weights are applicable based on the size of the loan as well as the loan to value ratio (LTV).

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

Such loans shall attract a risk weight of 35 per cent where LTV is less than or equal to 80 per cent, and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 per cent. This measure is expected to give a fillip to bank lending to the real estate sector.

Currently, the LTV ratios, risk weights and standard asset provisioning rate for individual housing loans sanctioned are as under:

“At present risk weight on housing loans is based on the amount of loan and LTV. Now it is linked with LTV only. Earlier all loans above Rs 75 lakh were carrying the same risk weight irrespective of low LTV of loan now even big loans with low LTV will carry low-risk weight. This is good for HFCs lending big-ticket size loans with low LTV and also boost to the real estate sector. Lenders will offer differential interest based on LTV as their capital requirement will be lower with low-risk weight on low LTV,” says Deo Shankar Tripathi, MD & CEO of Aadhar Housing Finance

“The status quo on repo rate was expected as inflationary pressures made it difficult to cut rates further. Rationalising risk weightage on home loans and linking it to Loan to Value (LTV) ratio will effectively result in higher credit flow to the real estate sector, which is positive news for the sector,” says Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and Proptiger.com

Co-origination Model

The Reserve Bank had, in 2018, put in place a framework for co-origination of loans by banks and a category of Non Banking Financial Companies (NBFCs) for lending to the priority sector subject to certain conditions.

The arrangement entailed joint contribution of credit at the facility level, by both the lenders as also sharing of risks and rewards between them for ensuring appropriate alignment of respective business objectives.

Based on the feedback received from the stakeholders, to better leverage the respective comparative advantages of the banks and NBFCs in a collaborative effort, and to improve the flow of credit to the unserved and underserved sector of the economy, it has been decided to extend the scheme to all the NBFCs (including HFCs).

This will make all priority sector loans eligible for the scheme and give greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc. The proposed framework will be called as “Co-Lending Model”. The revised guidelines will be issued by end of October 2020.

“The announcement to allow co-origination of loans to all NBFCs and HFCs for priority sector lending should help banks and NBFCs supplement each other’s strengths for improving credit flow to the underserved borrower segments. While banks have a regulatory obligation to meet its priority sector lending targets, the NBFCs have played an important role in serving this segment. This would help transfer some liquidity from the banking system to the NBFCs and help improve overall credit flow,” says Naveen Kukreja – CEO& Co-founder, Paisabazaar.com