Housing Loans by Commercial Banks
Loan to Value Ratio in Housing Loans
104. At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks’ housing loan exposures. In order to prevent excessive leveraging, it is proposed:
- that the LTV ratio in respect of housing loans hereafter should not exceed 80 per cent.
105. At present, the risk weights on residential housing loans with LTV ratio up to 75 per cent are 50 per cent for loans up to `30 lakh and 75 per cent for loans above that amount. In case the LTV ratio is more than 75 per cent, the risk weight of all housing loans, irrespective of the amount of loan, is 100 per cent. Accordingly, it is proposed:
- to increase the risk weight for residential housing loans of `75 lakh and above, irrespective of the LTV ratio, to 125 per cent.
106. It has been observed that some banks are following the practice of sanctioning housing loans at ‘teaser rates’, wherein the loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, it is proposed:
- to increase the standard asset provisioning by commercial banks for all such loans to 2 per cent.
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