HOME LOANS TO BECOME CHEAPER, THANKS TO RBI'S LATEST MOVE.
                     HOME  LOANS  TO  BECOME  
CHEAPER,  THANKS  TO  RBI''S  
LATEST  MOVE
INTRODUCTION
• To make home loans cheaper, the Reserve Bank of India said that it will rationalize the 
risk weights and link them to Loan-to-Value (LTV) ratios for new housing loans 
sanctioned up to March 31, 2022.
Source: livemint.com
WHY RBI TOOK THE STEP?
• Recognizing the criticality of real estate sector in the economic recovery, given its role 
in employment generation and the inter-linkages with other industries, RBI decided, as 
a countercyclical measure, to rationalize the risk weights by linking them only with LTV 
ratios for all new housing loans sanctioned.
Source: Financialexpress.com
HIGHER CREDIT FLOW 
• Rationalizing risk weightage on home loans and linking it to Loan to Value (LTV) ratio 
will effectively result in higher credit flow to the real estate sector, which is positive 
news for the sector.
Source: livemint.com
BOOST THE REAL ESTATE SECTOR
• This move by the central bank addresses the urgency required to boost the real estate 
sector in the country. 
• Home loans will become accessible and competitive for the customers.
Source: The Economic Times
WHAT IT MEANS FOR HOME LOAN BORROWERS?
• Loan-to-Value (LTV) ratio refers to the proportion of the property value that a lender 
can borrow through a loan. 
• Lenders set the LTV ratio for a loan applicant after factoring in his credit profile and the 
regulatory caps for the concerned loan type set by the regulator.
Source: YouTube
RISK WEIGHTAGE 
• The central bank prescribed the risk weightage on a home loan based on its size. 
– The bank must maintain 35% of the regulatory capital if the loan amount is up to ₹30 Lacs. 
– If the loan amount is higher than ₹30 Lacs but does not exceed ₹75 Lacs, the bank is required 
to have the capital provision at 50% of the loan value. 
– When the loan amount exceeds ₹75 Lacs, the bank needs the capital provision at 75% of the 
loan amount. 
Source: livemint.com
PRESENT SCENARIO
• At present, the risk weights are linked to size of the loan as well as the loan to value 
(LTV) ratio. 
• By removing the loan size from the equation the central has allowed banks more room 
to lend to borrowers for high-value properties.
Source: The Balance
BANKS CAPITAL 
• The risk weightage assigned to LTV will free up banks capital for additional lending. 
• It will also help them to bring down the lending rates because they will have spare 
capital to lend.
Source: The Economic Times
 LOAN TO VALUE (LTV) RATIO
• For the lower loan ticket size, where the bank’s capital requirement may go up 
depending on the LTV for a specific loan, it will provide better risk coverage to the 
bank. 
• From the regulatory side, LTV of a home loan book will reveal its real risk 
characteristics. 
Source: The Financial Express
 CUSTOMER SEGMENT
• With reduced risk weights for loans above ₹75 lakh, the cost of lending to this 
customer segment will come down for the lenders as they will have to set aside a 
lower amount of capital for such loans. 
• Hence, lenders are likely to pass on the benefit to this customer segment by reducing 
the lending rates for loans above ₹75 lakh
Source: Moneycontrol.com