How the rationalization of risk weights and the co-lending model will help borrowers


The co-loan model has been extended by the RBI to all NBFCs, including HFCs.

The RBI in its October monetary policy review, it left key rates unchanged, but announced a few other measures that could lower the cost of borrowing. In view of other previous cuts and measures, the cost of funds for banks already appears to be falling. Several banks have reduced their MCLRs in recent weeks. “Even though the umbrella bank has kept the rates unchanged, we still believe that it is possible for financial institutions to reduce their lending rates for their customers. During the lockdown, the RBI cut the repo rate which failed to cheer up the market, however, today’s rates could help smooth the economy to some extent and whose benefits have yet to be fully passed on to customers, ”Amit said. Modi, Director, ABA Corp and President (elect) CREDAI Western UP.

The RBI has taken two key steps. First, the risk weighting for banks was changed, and second, the co-organization of loans for NBFCs and HFCs was allowed.

Loan risk weighting

With regard to the regulations on the capital requirement for credit risk of individual mortgage loans by banks, differential risk weights are applicable depending on the size of the loan as well as the Loan to Value (LTV) ratio.

Recognizing the criticality of the real estate sector in the economic recovery, given its role in job creation and interconnections with other industries, the RBI decided, as a counter-cyclical measure, to rationalize risk weights by Binding them only to LTV ratios for all new mortgage loans sanctioned until March 31, 2022.

These loans have a risk weight of 35% when the LTV is less than or equal to 80%, and a risk weight of 50% when the LTV is greater than 80% but less than or equal to 90%. This measure should give a boost to bank loans to the real estate sector.

Currently, the LTV ratios, risk weights and standard asset provision rate for sanctioned individual mortgage loans are as follows:

“Right now, the risk weight on home loans is based on the loan amount and the LTV. Now it is related only to LTV. Previously, all loans above Rs 75 lakh carried the same risk weight regardless of the low LTV of the loan. Now even large loans with a low LTV will have a low risk weight. This is good for HFCs who give large loans with low LTV and also for boosting the real estate industry. Lenders will offer differential interest based on LTV because their capital requirement will be lower with a low risk weight on a low LTV, ”said Deo Shankar Tripathi, Managing Director and CEO of Aadhar Housing Finance.

“The status quo on the repo rate was expected because inflationary pressures made it difficult to cut rates again. The rationalization of the risk weighting on mortgages and its link to the Loan to Value (LTV) ratio will effectively lead to an increase in credit flows to the real estate sector, which is positive news for the sector, ”said Dhruv. Agarwala, CEO of the group, Housing.com, Makaan.com and Proptiger.com

Co-Origin Model

In 2018, the Reserve Bank set up a framework for coordinating loans by banks and a category of Non-Bank Financial Corporations (NBFCs) for loans to the priority sector under certain conditions.

The agreement involved a joint credit contribution at the facility level, by the two lenders as well as the sharing of risks and rewards between them to ensure an appropriate alignment of the respective business objectives.

Based on feedback received from stakeholders, to better leverage the respective comparative advantages of banks and NBFCs in a collaborative effort, and improve the flow of credit to the unserved and underserved sector of the economy , it was decided to extend the scheme to all NBFCs (including HFCs).

This will make all loans in the priority sector eligible for the mechanism and give greater operational flexibility to credit institutions, while requiring them to comply with regulatory guidelines on outsourcing, KYC, etc. The proposed framework will be called the “co-loan model”. The revised guidelines will be published by the end of October 2020.

“The announcement to authorize the coordination of loans to all NBFCs and HFCs for priority sector loans should help banks and NBFCs complement their mutual strengths to improve credit flows to underserved borrower segments. While banks have a regulatory obligation to meet their priority sector lending targets, NBFCs have played an important role in serving this segment. This would help transfer liquidity from the banking system to NBFCs and help improve the overall flow of credit, ”said Naveen Kukreja – CEO and Co-Founder, Paisabazaar.com

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