What changed
First, for undisbursed housing/other loan amounts, the risk-weighted assets computed under step 1 and step 2 of paragraph 6.3.1 of the Master Direction are now capped at the RWA for an equivalent disbursed loan. Second, the risk weight for standard fund-based and non-fund based exposures to 'Commercial Real Estate – Residential Building' has been set at 75%, while non-standard exposures remain at 100% under 'Other Assets' as per Sr. No. 6(d) of paragraph 6.2.
What it means for you
HFCs will now have a more consistent capital treatment between disbursed and undisbursed loan exposures, preventing a potential anomaly that could inflate capital requirements. The lower 75% risk weight for standard CRE-Residential Building exposures reduces capital charge for performing loans, freeing up capital for further lending. Non-standard CRE exposures still attract the higher 100% risk weight, maintaining prudence.
What you must do
- Update your RWA computation models to cap undisbursed loan RWA (computed per step 1 and step 2 of paragraph 6.3.1) at the equivalent disbursed loan RWA.
- Reclassify standard CRE-Residential Building exposures to the 75% risk weight category from the date of the circular.
- Ensure non-standard CRE-Residential Building exposures remain at 100% risk weight under 'Other Assets'.
- Review and adjust capital adequacy calculations to reflect these changes from the circular's date.
Who it affects
Housing Finance Companies (HFCs), Risk management teams at HFCs, Compliance and capital planning departments
Does the 75% risk weight apply to all CRE-Residential Building exposures?
No, it applies only to standard (performing) exposures. Non-standard exposures still carry a 100% risk weight under the 'Other Assets' category as per Sr. No. 6(d) of paragraph 6.2.
When do these changes take effect?
The instructions are applicable from the date of the circular, August 12, 2024. No transition period is provided.
Does this circular affect any other instructions in the Master Direction?
No, all other instructions in the Master Direction remain unchanged. Only the two specific modifications mentioned are effective.