Banks request RBI to relax risk-weight norms on home loan

The Indian Bankers held a meeting with RBI Governor D. Subbarao and requested the Reserve Bank to relax risk-weight norms on home loan up to Rs 20-lakh to reduce their burden before its quarterly policy review.

While currently the risk-weight for housing loans below Rs 20 lakh is 0.75 per cent therefore the lenders have to make provisions in accordance to this while giving advances to borrowers.

Indian Banks' Association's Chief Executive, K Ramakrishnan informed, "They have suggested that the existing risk-weight on home loans to be removed, which would significantly bring down the provisioning burden on banks."

In a meeting with RBI Governor D Subbarao it is believed the bankers have also suggested the Reserve Bank for further relaxation in norms related to trade finance to export-oriented firms.

He added, "With the global funding sources drying up in the wake of global financial turmoil, there is an increased pressure on Indian banks from all categories of companies for credit".

Ramakrishnan, who was also present in the meeting told in contrary to the general observation, Indian banks have increased their lending this fiscal.

Ramakrishnan further added that at present average credit growth in the Indian banking system stands around 24.5 per cent as against 22.4 per cent in the previous fiscal, with the credit-deposit ratio stands at 74.11 per cent.

HFCs under pressure to reduce interest rate on home loans

The housing companies (HFCs) will be coming under pressure to reduce the interest rates on home loans as the public sector banks have taken a final decision on this.

However HFCs are complaining that the cost of funds is showing no signs of easing because banks are still charging around 13 per cent, which is higher than their average lending rate.

For example, LIC Housing Finance Company (LICFC) and Housing Development Finance Corporation (HDFC), which leads by over 70 per cent of HFCs’ market share is charging around 11.5 per cent, while Dewan Housing Finance Company is charging between 12 and 14 per cent to customers.

Whereas the weighted average cost of working funds for HFCs set around 300 basis points higher as compared to public sector banks. After this new package HFCs’ lending rates — which is higher by 50-100 basis points as compared to public sector banks — are believed to move up further by 225 basis points to 350 basis points (for loans up to Rs 20 lakh).

“We need to figure out ways for cheaper finance as there is no option left for us but to reduce interest rates to remain competitive and protect our market share,” said an HFC CEO, who refused to be named.

It is also believed that the with the proposed cheaper window from National Housing Bank (NHB), HFCs are expected to come up with a counter strategy to protect their market share.

“We are waiting for details of the package to understand its impact. We will decide on our counter strategy in a couple of days. However, apart from the proposed NHB fund, we need to explore other alternative avenues of cheaper finance as well,” said LIC Housing Finance Director and CEO R R Nair.

According to industry approximation HFCs comprise over 40 per cent of the Rs 120,000 crore housing finance market and share of these companies with respect to the incremental market share will probably fall to 15 per cent at the end of 2008-09 from around 25 per cent during 2007-08.