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Risk weights cut on home loans credit negative for banks: Moody`s
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.
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 Thursday.
It said this growth is 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 percent from the earlier 75 percent, while for loans between Rs 30 lakh and Rs 75 lakh, the risk weights were cut to 35 percent from 50 percent.
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 percent from the earlier 0.40 percent.
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 percent, down from 10.2 percent the previous year.
"Although lower risk weights would boost sluggish credit growth while limiting the effect on banks' capital position, we believe competition for housing loans has significantly increased among banks and non-bank finance companies," the report said.
Since 2015, housing loan growth has been roughly double that of overall bank credit.
In 2015, overall bank credit growth was 7.8 percent while housing credit was at 16.7 percent. In the year ended March 2017, bank credit grew at 7.6 percent whereas home loan segment witnessed a 15.2 percent growth.