RBI tightens norms on home loans to curb excessive borrowing | business | Hindustan Times
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RBI tightens norms on home loans to curb excessive borrowing

business Updated: Nov 02, 2010 22:35 IST

The RBI on Tuesday made the norms for housing loans more stringent to curb the excessive borrowing that has pushed property prices in metros close or beyond levels seen before the global financial meltdown.

Among the steps mandated by the RBI is an increase in the risk weight of high-value loans, an increase in the funds to be kept aside by banks as a cushion in case of defaults on loans made at teaser rates and bringing down the ceiling limit on housing loans to 80 per cent of the property value.

"The real estate prices have reached or even surpassed pre-crisis level in most metros," RBI Governor D Subbarao told reporters in Mumbai after the Reserve Bank conducted its mid-year policy review.

However, he downplayed fears of an asset bubble. "There is certainly asset prices build-up because of a number of factors, including the liquidity in the system. We have taken measures in the housing sector. We studied them because we thought that we must rein in loose practices in most of the housing sector," Subbarao said.

"It is proposed to increase the risk weight for residential housing loans of Rs 75 lakh and above to 125 per cent," he said.

Increasing the risk weight means banks will have to keep more money aside against high value loans, which had a risk weight of 50-100 per cent till now.

In its quarterly monetary review today, the RBI also asked banks to set aside a higher amount for controversial teaser home loans rates to act as a cushion in case of defaults. Teaser home loans are offered at low interest rates during the initial years.

The RBI has also capped the maximum value of housing loans to 80 per cent of the value of the property. This is intended to dissuade excessive borrowing for housing purposes.

Till now, banks used to impose their own ceiling on housing loans, but there was no cap from the RBI side.

"The reduction in the loan-to-value (LTV) amount and increase in higher capital adequacy for high value loans beyond Rs 75 lakh will bring in the necessary checks and balances on the overall funding of the real estate sector. This is in continuation of identifying the potential risk in the system," Birla Sun Life AMC CEO A Balasubramaniam said.

"The floating (interest) rates are expected to move up now, but it does not have any direct impact on the demand scenario, especially in a city like Mumbai. The RBI, in its wisdom, wants to control inflationary pressures," Housing Development Infrastructure Ltd (HDIL) Managing Director Sarang Wadhawan said.

"In Mumbai, it is need-based demand and not liquidity-driven demand. There is serious short supply. The floating rates are bound to go up now," he said.