The lower capital requirements will weaken banks’ protection against the housing sector, which has grown rapidly in recent years, and will encourage greater lending.
Moody’s warned that this growth was occurring because non-bank finance companies (NBFCs) were increasingly targeting the home-loan segment, posing greater downside risks if there was a correction in property prices.
The RBI’s notification affects the risk weights of newly originated housing loans in two main categories. For housing loans of more than Rs 75 lakh, the risk weight will fall to 50 per cent from 75 per cent. And for housing loans of Rs 30-75 lakh, the risk weights will decline to 35 per cent from 50 per cent.
At the same time, the RBI has removed the previous distinction of risk weights based on loan-to-value ratios for loans in the same category.
The RBI also has lowered the standard asset provisioning requirement to 25 basis points from 40. There is no change to the risk weights for housing loans of up to Rs 30 lakh.
Moody’s said over the next 12-18 months, overall credit growth would remain muted, given banks’ weak balance sheets amid continued asset quality deterioration. At the end of March, annual bank credit growth was 7.6 per cent, down from 10.2 per cent the previous year.
Although lower risk weights would boost sluggish credit growth while limiting the effect on banks’ capital position, the competition for housing loans has significantly increased among banks and NBFCs. Since 2015, the housing loan book has grown at a substantially higher rate than overall bank credit growth.
In the year ended March 2015, the housing finance portfolio grew by 16.7 per cent, while overall loan growth was 7.8 per cent. And during the years FY16 and FY17, the housing finance portfolio rose by 18.8 per cent and 15.2, while overall bank credit expanded by 10.2 per cent and 7.6 per cent, respectively, Moody’s added.