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De-jargoned: Risk weightage for home loans

LiveMint logoLiveMint 13-06-2017 Vivina Vishwanathan

From the beginning of this year, banks have been reducing interest rates on home loans. The biggest drop was seen in the category of loans below Rs30 lakh, after the government’s push for affordable housing. The fall in interest rates is now slowly trickling down to the higher loan amounts too. Interest rates on home loans above Rs75 lakh are likely to get cheaper thanks to the recent monetary policy announcement. For instance, last week State Bank of India, the country’s largest lender, cut interest rates on loans above Rs75 lakh loans by 10 basis points. One basis point is one-hundredth of a percentage point.

In its press release, the State Bank of India said that it passed on the benefit to consumers after Reserve Bank of India (RBI) reduced the risk weightage on home loans.

Here is look at how risk weightage for home loans impact interest rates.

During the recent monetary policy announcement, the RBI reduced risk weightage for home loans. According to the recent RBI notification, the risk weightage on home loans above Rs75 lakh has been reduced from 75% to 50%.

What is risk weightage? Risk weightage indicates the risk considered by the central bank on any loan. The RBI allots risk weights to all loans that banks offer. The risk weight can vary based on the type of loan and loan amount. A lower risk weight indicates that the bank will have to set aside lesser money for provisioning these loans.

Since banks would have to keep aside lower amounts to provide these loans, they will have more amount to lend. Thus it passed on this benefit to the customers by reducing interest rate.

During the monetary policy announcement, the central bank also said that it saw the lowest delinquency in home-loan category. This indicates that the RBI is willing to take risks in the home-loan segment, including the higher loan amount segment. As of now, interest rates on loans below Rs30 lakh are at least 20 basis points cheaper. With lower risk weightage on loans above Rs75 lakh, interest rates are set to fall further in this category. If you are planning to take a home loan of more than Rs75 lakh, you should compare the rates across banks. In the current falling interest rate environment, you would benefit from opting for floating loan rates. Factor in marginal cost of fund for lending rates (MCLR) and spread while looking at interest rates. Besides this, calculate the administrative fee, processing fee and any other charges as well.

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