RBI measures to mitigate banks’ risks, may raise home loan rates: CRISIL

The various measures relating to housing loans announced by the Reserve Bank of India in the second-quarter review of its monetary policy for 2010-11 are a step in the right direction to mitigate emerging risks from 'teaser loan rates' and higher loan-to-value (LTV) ratios, particularly in large-ticket home loans segment, in the banks' housing loan portfolios.

According to rating agency CRISIL, housing finance is one of the highest exposure segments for Indian banks and RBI's latest measures would ensure that the credit quality in this segment, which traditionally has low non-performing assets, remains robust.

CRISIL said that it expects these measures, coupled with the increase of 25 basis points in benchmark rates by RBI, to translate into a firming up of home loan rates and thereby, a moderation in demand for, and disbursement of, loans in the near future.

RBI's measures primarily comprise a cap on the LTV of all housing loans at 80 per cent, and an increase in the standard asset provisioning for teaser-rate loans by five times to 2.0 per cent from 0.4 per cent.

RBI has also proposed increasing the risk weights for residential housing loans of Rs7.5 million and above to 125 per cent irrespective of the LTV levels. CRISIL believes that similar provisions are likely to be made applicable to housing finance companies to bring about the desired impact in the entire home loan market.

''CRISIL had earlier highlighted the risks arising out of aggressive growth in the banks' teaser-rate home loan portfolios, in terms of the borrowers' servicing ability once these loans migrate to market-linked rates. Despite a steady increase in interest rates over the past one year, many banks have continued to offer home loans with teaser interest rates,'' says Pawan Agrawal, director, CRISIL Ratings.