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RBI tightens norms for home loans
Published on 3 Nov. 2010 12:11 AM IST
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The Reserve Bank of India (RBI) Tuesday tightened the norms for home loans, asking banks to cap the loan amount at 80% of the cost of the house to check possible defaults and prevent an asset bubble.
“In order to prevent excessive leveraging, it is proposed that the loan to value (LTV) ratio in respect of housing loans hereafter should not exceed 80%” said Governor D. Subbarao in the central bank’s second quarter review of monetary policy for this fiscal. He said “asset prices in India, as in many other emerging economies have risen sharply in a short time which is a cause for concern.”
LTV ratio is used to determine how much of a property can be financed. At present, there is no regulatory ceiling on LTV ratio in respect of banks’ housing loan exposures. Also, RBI increased provision that banks need to set aside to shield them from home loan defaults.
For home loans up to `30 lakh and where the disbursal is till 75% of the loan amount, banks are required to set aside up to 50% of the loan as provision in case of default. But for disbursal more than 75%, central bank asked all banks to set aside 12% of the home loan as provision against default. This provision was earlier at 100% of the loan.
RBI also sought to discourage banks from aggressively selling “teaser loans”, which are a big hit with people who want to buy houses. In teaser loans a borrower pays a low interest rate during the initial years of the loan. The rate of interest then increases after a few years. These loans generally offer fixed interest rates in the initial years which later on convert to a floating one.
Banking chief executives, who were present at the RBI, said the increase in provisions could lead to an increase in home loan rates. ICICI Bank’s Chief Executive Chanda Kochhar said such loans formed only “a very small part of the portfolio especially for banks with a large asset base.” Still, she expected “some amount of upward bias in the interest rates” in the near future.

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