Rating agency Moody’s on Thursday said that the Reserve Bank of India’s move to relax regulatory norms for housing finance may increase the risks for banks. It is credit negative.
On June 7, RBI lowered the risk weights and standard asset provisioning on housing loans in select loan-size categories.
The lower capital requirements will weaken banks’ protection from the housing sector, which has grown rapidly in recent years, and will encourage greater lending.
Moody’s warned that 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.
The RBI’s notification affects the risk weights of newly originated housing loans in two main categories. For housing loans more than Rs 75 lakh, the risk weights will fall to 50 per cent from 75 per cent. And for housing loans between Rs 30-75 lakh, the risk weights will decline to 35 per cent from 50 per cent.
At the same time, the RBI has removed the previous distinction of risk weights based on loan-to-value ratios for loans in the same category.
RBI also has lowered the standard asset provisioning requirement to 25 basis points from 40. There is no change to the risk weights for housing loans up to Rs 30 lakh.
Moody’s said over the next 12-18 months, overall system credit growth will remain muted given banks’ weak balance sheets amid continued asset quality deterioration. At the end of March 2017, annual bank credit growth was 7.6 per cent, down from 10.2 per cent the previous year.
Although lower risk weights would boost sluggish credit growth while limiting the effect on banks’ capital position, the competition for housing loans has significantly increased among banks and non-bank finance companies. Since 2015, housing loan book has grown at substantially higher rate than pace of overall bank credit growth.
In year ended March 2015, Housing finance portfolio grew by 16.7 per cent while overall loan growth was 7.8 per cent. And during the period of FY16 and Fy17, housing finance portfolio rose by 18.8 per cent and 15.2, while over-all bank credit expanded by 10.2 per cent and 7.6 per cent respectively, Moody’s added.