Risk weight is the proportion of loans that is counted with the total assets against which banks have to maintain statutory reserves. A high risk weight discourages lending by increasing the capital requirement for lenders.
There is a growing concern that despite the recent rate cuts by the RBI the benefit has not been passed on by banks to borrowers adequately. The RBI has cut its policy rate by three quarters of a percentage point over the past six months. Interest rates on home loans have come down to single digits after the latest round of cuts, but are still felt to be expensive by many borrowers. The rates are hovering around 9.75 percent.
Banks say there has been no steep reduction in the interest rates owing to their balance sheets and higher rates on the government’s own small savings schemes. They say a lower risk weight on housing loans will be an incentive for them to bring down their interest rates in this segment. A lower provisioning requirement is expected to help banks bring down their interest rates. This will give a boost to demand in the construction sector.
The view of the banks is that these loans are a secured exposure. The RBI should consider bringing the risk weight down to 20-25 percent for a loan of Rs 75 lakhs. This will help banks bring down their interest rates by 2550 basis percentage points.
By lowering the provisioning requirements, the RBI will enable the release of more resources to banks. There will be more liquidity in the banking system. Also, it will enable higher margins for banks. The banks can, in turn, use this money to invest in other productive avenues, and thereby improve their margins further.
All these factors will lead to the cost of housing loans advanced by banks to individuals coming down. With more availability of funds and a reduction in cost, home loan borrowers can expect lower interest rates.