How Risk Weightage Decided By RBI On Home Loans Impacts Interest Rates?

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Before delving into this question, let us first know what risk weightage is. For different loan segments such as car, housing, personal and education loan, the apex bank, perceives different scale of risk and this inherent risk on a loan category is indicated by risk weightage. The risk weight applies to even corporate lending and has a direct bearing on the borrower of the loan.

How Risk Weightage Decided By RBI On Home Loans Impacts Interest Rates?

In the recent monetary policy review, the RBI has slashed its risk weightage on high value loans of over Rs. 75 lakhs from the earlier 75% to 50%. This in simple terms means that as the value of loan is high there is a high associated risk with respect to repayment. So, RBI as a cautious stance asks banks to keep aside some capital for the provisioning of these loans.

Risk weightage is decided as the percentage of Loan to value or LTV ratio. A higher risk weightage on a loan category means banks need to keep aside more capital for the provisioning and viceversa.

So, with reduction in risk weightage on home loans, liquidity for the banks in respect of the availability of more capital for lending increases. Thus more amount can now be disbursed at a lower rate, if banks decide to pass on this benefit to borrowers.

Hence with interest rates likely to go down further for high value home loans after the recent monetary policy announcement and the apex body's stance to take a higher risk on this loan segment in the wake of lowest delinquency reported, it may be best for you to opt for a floating home loan rate.

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Story first published: Friday, June 16, 2017, 14:15 [IST]
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