Interest rate on home loans is likely to come down by another 25-30 basis points (bps) over the next few months, triggered by the Reserve Bank of India’s (RBI) move to lower risk weights on select home loans (up to Rs.75 lakh) where borrowers are willing to put in more money and thus lower the loan-to-value (LTV) ratio, according to Crisil Research report.
Theoretically, lower risk weights should significantly boost the return on equity (RoE) of the mortgage portfolio of banks.
However, with competition in home loans continuously intensifying and the interest-rate cycle turning south, we believe this is unlikely, and banks will have to pass on the benefit to borrowers. Therefore, any boost to RoE would be marginal, the research report says.
Crisil estimates that around 80 per cent of home-loan borrowers and 70 per cent of home loans (by value) would meet the criteria for lower risk weights set by the RBI and thereby benefit from the change in regulation. LTV ratios for home loans have been moving down over the years. Data on home loans disbursed across 13 cities show average LTV has come down from 75 per cent in the third quarter of fiscal 2010 to 66 per cent in the same quarter of fiscal 2015. This means a higher proportion of new loans would meet the criteria for lower risk weights.
Home loan borrowers in smaller cities are likely to be the biggest gainers from the RBI move due to limited supply at affordable price points in the larger cities. As per Crisil Research’s analysis, around a quarter of the incremental housing stock supply in the top 10 cities would have a price point lower than Rs.40 lakh. The RBI has, over the years, been relaxing regulatory norms for home loans, taking cognisance of the healthy asset quality and low credit losses in this segment.
Lower risk weights in a scenario where competition in the home loan market is intensifying and interest rates cycle is easing, would push down interest rates for home loans, thereby limiting any gains on the RoE front for banks.
