While taming inflation and inflationary pressure by increasing the policy short-term indicative rates by 25 basis points, the Reserve Bank of India (RBI) on Tuesday resorted to forestall a housing bubble by hiking the risk weightage for housing loans above Rs. 75 lakh to 125 per cent.
Signalling a clear commitment to target the high inflation as well as the persisting inflationary expectations, the move would prevail upon banks to increase lending rates across the board, especially of housing loans.
“Asset prices in India, as in many other Emerging Market Economies, have risen sharply in a short time, which is a cause for concern,” said RBI Governor D. Subbarao at a press conference here after meeting bankers for the half yearly review of the Monetary Policy 2010-11.
“The equity market is close to its previous all-time peak level. Residential property prices in metropolitan cities have gone beyond the pre-crisis peak level. Gold prices are ruling at an all-time high level. Although the income levels of households and earnings of corporates in India have continued to rise, a sharp rise in asset prices in such a short time causes concern,” said Dr. Subbarao warning of an asset bubble.
At present there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks' housing loan exposures. In order to prevent excessive leveraging, the RBI has proposed that the LTV ratio for housing loans hereafter should not exceed 80 per cent.
The RBI has also increased the standard asset provisioning by commercial banks for all housing loans with teaser rates to 2 per cent “in view of the higher risk associated with such loans.”
It has been observed that some banks are sanctioning housing loans at ‘teaser rates,' wherein the loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates.
“This practice raises concern, as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates,” the RBI said.
