What changed
RBI reduced the risk weight on residential housing loans to individuals up to Rs 20 lakh from 75% to 50%. The same reduction applies to banks' investments in mortgage-backed securities issued by NHB-regulated HFCs, backed by such loans. This is a temporary measure, subject to review after one year.
What it means for you
Banks will need to hold less capital against housing loans up to Rs 20 lakh, improving capital efficiency and potentially encouraging more lending in this segment. The move aligns with Basel II's standardized approach, which prescribes a 35% risk weight for fully secured residential mortgages under strict criteria. However, the reduced risk weight is temporary and may be revised based on default experience.
What you must do
- Update internal capital adequacy calculations to apply 50% risk weight for eligible housing loans up to Rs 20 lakh.
- Ensure proper documentation and monitoring of housing loans to qualify for the reduced risk weight.
- Review investment portfolios in MBS of HFCs to apply the 50% risk weight where backed by qualifying loans.
- Prepare for a review after one year; track default experience and other relevant factors for potential changes.
Who it affects
All commercial banks (excluding Regional Rural Banks), Housing finance companies regulated by NHB
Does the reduced risk weight apply to all housing loans?
No, it applies only to housing loans up to Rs 20 lakh to individuals against mortgage of residential properties. Loans above Rs 20 lakh retain the earlier 75% risk weight.
Is this change permanent?
No, it is a temporary measure. RBI will review the risk weight after one year, considering default experience and other factors.
How does this affect banks' capital requirements?
Lower risk weight means banks need less capital for these loans, freeing up capital for other lending or investment. This can improve return on equity for banks.