PSU bank request relaxation in 75% risk weight on small home loans

The public sector banks are requesting the Reserve Bank of India (RBI) to either completely waive or substantially relax the 75 per cent risk weight that banks are required to attach to such home loans. Banks are following in line with Government’s diktat to extend home loans of up to Rs 20 lakh at concessional rates of interest thus they are ‘sacrificing their interests’ by offering home loans at subsidized interest rate of up to 9.25 per cent.

Dr K. Ramakrishnan, Chief Executive, Indian Banks’ Association pointed out, “Besides paring interest rates on home loans up to Rs 20 lakh, public sector banks have also brought down the loan-to-value ratio, and are providing borrowers free life insurance. Hence, banks have sought relaxation in risk weights on home loans to free up capital.”

At present the Government is not giving any subvention (financial support to make good the gap between market rate and the rate at which they expect these banks to lend) to public sector banks (PSBs) for offering home loans at subsidized interest rates. Banks argue that if the central bank gives relaxation on risk-weights, which will ease pressure on capital.

Banks want this relaxation in risk weights in their consultation with the RBI Deputy Governor, Dr Rakesh Mohan. On January 15 a meeting was organized, it was a part of the central bank’s exercise to consult stakeholders before the third quarterly review of monetary policy on January 27.

As per the housing loan scheme launched early last month by PSBs, interest rate on home loans of up to Rs 5 lakh of 20 years’ tenure would not exceed 8.5 per cent for the first five years, while the same for loans from Rs 5 lakh to Rs 20 lakh will not exceed 9.25 per cent.

As homes are reasonably priced in Tier-II cities and Tier-III towns, therefore PSBs are receiveing a good response to the concessional scheme for loans up to Rs 20 lakh. But this is not true in the case of the larger cities.

As per PSB official, as per the current deposit rates and statutory allocation towards SLR and CRR, most PSBs have to finance the interest rates they offer on home loans up to Rs 20 lakh.

Thus Bankers are of view that the RBI is more likely to reduce the risk weight to 50 per cent rather than waive the risk weight.