RBI move on LTV ratio to cut down home loan rates: Crisil

Mumbai: RBI's move to lower loan-to-value ratios and risk weights for individual housing loans can help bring down interest rates on home loans by another 25-30 basis points over the next few months, says a report.

"We expect interest rate on home loans to come down by another 25-30 bps over the next few months, triggered by RBI's move to lower risk weights on select home loans (up to Rs 75 lakh) where borrowers are willing to put in more money and thus lower the loan-to-value (LTV) ratio," the report by rating agency Crisil said.

Yesterday, the banking regulator said in the case of 'individual housing loans' falling under the category of up to Rs 30 lakh, the LTV ratio would be up to 90 percent. Earlier, the facility was available only in cases where the cost was up to Rs 20 lakh.

For properties above Rs 30 lakh and up to Rs 75 lakh, the LTV will be up to 80 percent and those above Rs 75 lakh, it will be 75 percent.

A slew of banks, including State Bank of India, PNB, IDBI Bank and Bank of Baroda, Bank of India, Axis Bank, ICICI Bank, have lowered their base rates after RBI on September 29 reduced its repo rate by a hefty 50 bps to 6.75 percent.

RBI has lowered risk weights on housing loans of up to Rs 75 lakh from 50 percent to 35 percent in cases where the borrower puts in at least- 20 percent of the value of the home as own equity for loans up to Rs 30 lakh; and, 25 percent of the value of the home as own equity for loans between Rs 30 lakh and Rs 75 lakh.

The report said, theoretically, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks.

"However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal."

According to the report, around 80 percent of home loan borrowers and 70 percent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation.

Home loan borrowers in smaller cities are likely to be the biggest gainers from the RBI move due to limited supply at affordable price points in the larger cities, it said.