Bringing prudence in lending to home borrowers, the Reserve Bank of India (RBI) today increased provisioning for teaser loan rates by 160 basis points, from 0.4 per cent to 2 per cent. For the first time, the central bank has sought to curb excessive leveraging by setting a loan-to-value (LTV) ratio of 80 per cent. This implies that banks can lend only up to 80 per cent of the property value, with the remaining 20 per cent to be paid upfront by the borrower.

In addition, the risk weight for residential housing loans of Rs 75 lakh and above has been hiked from 100 basis points to 125 basis points, irrespective of the LTV ratio.

At present, the risk weights on residential housing loans of Rs 30 lakh with LTV ratio up to 75 per cent is 50 per cent. For LTV above 75 per cent, the risk weight is 75 per cent, irrespective of the loan amount.

RBI Governor D Subbarao said teaser loans raise concerns, as some borrowers may find it difficult to service them once the normal interest rate, which is higher than the rate applicable in the initial years, kicks in.

RBI’s decision to cap the LTV will provide financial institutions a hedge against real estate price fluctuations and reduce speculation,” said R V Verma, chairman & managing director, National Housing Bank. NHB, he said, will examine these issues for housing finance companies as well. Housing Development Finance Corporation and LIC Housing Finance have fixed-cum-floating products similar to teaser rates.

Bankers said the hike in provisioning may not immediately impact larger banks with a strong current account-savings account ratio. However, there is an upward bias. “Bigger banks with good asset quality and CASA ratio may not immediately pass on the higher provisioning. But a 25-50-basis point hike is expected by December-January,” said a senior State Bank of India (SBI) official.

In a reaction to RBI’s policy moves, IDBI Bank increased rates by 25 basis points for home loans above Rs 75 lakh. “The rate was hiked due to higher capital adequacy requirements,” said the bank’s press release issued in the evening. Industry experts said other mid-sized and smaller banks could hike rates as well, especially after the festival season.

According to the SBI official, his bank’s increase in the home-loan portfolio in the last couple of years has largely been driven by a teaser rate of 8 per cent in the first year. At present, SBI has disbursed around Rs 23,000 crore under this scheme. “This implies a higher provisioning of Rs 400-450 crore,” he said. Bankers have also sought a clarification from RBI on provisioning once a borrower moves from fixed to floating rates.

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