Home Loans To Get Cheaper As RBI Cuts Repo Rate By 25 Bps
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Home Loans To Get Cheaper As RBI Cuts Repo Rate By 25 Bps

Home Loans To Get Cheaper As RBI Cuts Repo Rate By 25 Bps

Updated on August 2:

Announcing the Third Bimonthly Monetary Policy Statement on August 2, the Reserve Bank of India (RBI) announced a repo rate cut of 25 basis points. The repo rate now stands at six per cent. The reduction in repo rate — the rate at which the Central bank lends money to financial institutions — would make home loans cheaper, bringing down the total cost of home buying. 

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Last month, several public and private lenders, including Axis Bank, the State Bank of India, HDFC Bank and Indiabulls Housing, announced a reduction in home loan interest rates, primarily targeting the affordable housing segment. As the Prime Minister Narendra Modi-led government attempts to provide housing to everyone by 2020, the affordable housing segment has also been the target area for financial institutions. In fact, according to the Reserve Bank of India (RBI), loans for the affordable housing sector come under priority sector lending. However, measures announced in the RBI’s Second Bimonthly Monetary Policy Review for 2017-18 would also make borrowing more affordable for those looking for big-ticket loans, too.

Public lender State Bank of India became the financial institution on June 9 to announce a reduction of 10 basis points in interest rates — to 8.6 per cent — for home loans of over Rs 75 lakh. The reduction will come into effect from June 15. 

What triggered the move?

Despite the fact that the Governor Urjit Patel-led Central bank decided to keep the repo rate — the rate at which the Central bank lends money to other banks — unchanged for the fourth time in a row on June 7, it eased certain norms that would increase the liquidity into the system, enabling banks to cut rates. While all segments would benefit from the move as soon as banks start passing on the benefits, the luxury housing segment could emerge as the biggest gainer.

The three tweaks

  • The RBI has reduced the risk weightage for home loans of between Rs 30 lakh and Rs 50 lakh to 35 per cent from the earlier 50 per cent. These loans should have a loan-to-value (LTV) ratio of 80 per cent. Similarly, it has cut the risk weightage for loans of over Rs 75 lakh to 50 per cent from the current 75 per cent. These loans should have a loan an LTV of 75 per cent.

For the uninitiated, risk weightage is the capital banks have to set aside to control risks of bankruptcy. A reduction in the risk weightage proportion means banks will have more capital to lend and will also be able to lend this capital at reduced rates.

In effect, while borrowing would become cheaper across segments, the biggest beneficiaries would be those applying for Rs 75 lakh.

  • Another move that would ensure banks have more to lend is the reduction in the statutory liquidity ratio (SLR) by 50 basis points — from 20.5 per cent of a bank's net demand and time liabilities (NDTL) to 20 per cent. SLR is the portion of deposits which financial institutions must invest in government securities.
  • From 0.4 per cent to 0.25 per cent, the RBI has also lowered the standard asset provision — the amount financial institutions have to set aside as a security deposit — for banks. The rate reduction means that a bank will have to keep as security Rs 250 for giving a loan of Rs 1 lakh. Earlier, Rs 400 must have been kept as standard asset provision per lakh. This is another move that would provide financial institutions more room to cut interest rates.
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@@Mon Jul 31 2017 13:06:23