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« Finance Minister Assures growth of Indian Economy | Home | India’s Dying Building Boom »

Banks Lending Policies made Easier by RBI

Over the past few years, banks went all out to expand their home loan portfolios. In the present scenario of increasing interest rates and squeezing liquidity, the default rates are expected to increase. Bankers feel that home loan defaults could rise in the light of the economic slowdown. The delay in receipt of EMIs impacts the quality of loan assets of banks negatively. The Reserve Bank of India (RBI) had mandated strict guidelines for provisioning of loan assets of banks.

The RBI has extended guidelines on restructuring, that are currently available to industrial units, small and medium enterprises (SMEs) etc, to encompass home loans given by banks. This would benefit the banks. The RBI has said banks can now avail of the special regulatory treatment relating to asset classification on restructuring of home loans. Previously, the RBI had prescribed a ceiling of 10 years on the repayment period of restructured advances, thereby making housing loans, which have a tenure ranging between 15 and 20 years, not eligible for the special treatment. Home loans can be restructured either by extending the repayment period or by giving a moratorium on interest payment for a certain period.

According to the RBI circular , the ceiling of 10 years on the repayment period of restructured loans would not be applicable, subject to compliance with all other terms and conditions prescribed by it. The board of directors of the banks should prescribe the maximum period for restructured advances keeping in view the safety and soundness of advances. According to the RBI, the restructured housing loans should be risk-weighted with an additional risk weight of 25 percentage points to the risk weights prescribed. Previously, banks had to assign a risk weight of 50 percent on loans up to Rs 30 lakhs and 75 percent on loans of Rs 30 lakhs and above. This will prevent banks’ home loan assets from being downgraded once they are restructured, and help in improving the bottomlines of banks. Banks can book interest, but need not provision for bad or potentially non-recoverable loans. When the amount due to a bank (present value of principal and interest receivable as per restructured loan terms) is fully covered by the value of the security, charged in its favour, the bank’s due is considered to be fully secured.

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