The Telegraph
Since 1st March, 1999
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Access to housing loans gets tougher

Mumbai, April 18: Prospective borrowers had better watch out: it’s going to get harder to get home loans, especially if you are looking for an apartment in a metro that costs more than Rs 20 lakh.

Spooked by a burgeoning property bubble, the Reserve Bank of India today advised banks to winch up the provisioning on standard advances for personal loans and residential housing beyond Rs 20 lakh from 0.4 per cent to 1 per cent.

Shorn off the gobbledygook, what it means is that banks will be scrutinising home loan applications closely ' and there’s just a possibility that you won’t get the full amount you applied for and on the terms you desired.

The RBI wants to clamp down on indiscriminate housing loans ' and applicants for home loans could now face the heat.

In banking parlance, standard assets are loans on which there have been no defaults or which do not carry more than the normal risk attached.

The rule is that banks have to provide a certain amount against such loans in their balance sheet. Therefore, if a bank has Rs 100 as standard assets, it has to make provision to the tune of 0.40 per cent of this amount ' or 40 paise.

The RBI is worried that this housing asset bubble ' financed by massive doses of loans ' could burst and cripple the banking system.

In its effort to protect the banks’ balance sheets and make them aware of the dangers of excessive lending to real estate and housing without adopting proper safeguards, RBI governor Y.V. Reddy today raised the provisioning requirement for housing loans beyond Rs 20 lakh.

After presenting his credit policy, Reddy tried to allay fears about the impact of this action by saying that most housing loan seekers ask for up to Rs 15 lakh. However, the change will hurt home loan seekers in expensive cities like Mumbai, Delhi, Bangalore and even Calcutta.

Bankers say the enhanced provisioning requirement will only mean that they will have to provide more money in their balance sheets. This will hurt their profitability. To compensate for this, banks are likely to raise rates on home loans above Rs 20 lakh.

Institutions like HDFC now charge a floating rate of 8 to 8.25 per cent on home loans above Rs 20 lakh.

This is not the end of it. Bankers say the enhanced provisioning requirement will make the appraisal process for home loans more rigorous.

“The RBI is stressing on the quality of credit. Therefore, banks are likely to be careful while vetting loan proposals. Genuine borrowers who fulfil the criteria will, however, not be affected,” said the chief of a leading public sector bank.

The RBI has also raised the risk weightage for commercial real estate loans (those given to builders) to 150 per cent from 125 ' which could further restrict the flow of funds into housing.

Total housing loans outstanding as on January 20 this year amounted to Rs 166,159 crore.

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