New Co-lending model and rationalisation of Risk Weights for Housing loans

The Statement on Developmental and Regulatory Policies of RBI on its 4^th quarterly review has taken two key decisions. One, the the rationalization of risk weights for banks and secondly, the co-origination of loans for NBFCs and HFCs has been allowed.

Rationalisation of risk weight:

In terms of the extant regulations on capital charge for credit risk of individual housing loans by banks, differential risk weights are applicable based on the size of the loan as well as the loan to value ratio (LTV)*. As per extant regulations Home loans attract a risk weight of 35 per cent where LTV is less than or equal to 80 per cent, and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 per cent.  As per the new rules announced by MPC on Friday, risk weight is uniformly linked to only with LTV ratios for all new housing loans sanctioned up to March 31, 2022, as a countercyclical measure. “Recognising the criticality of real estate sector in the economic recovery, given its role in employment generation and the interlinkages with other industries, it has been decided, as a countercyclical measure, to rationalise the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022” the statement reads.  Hereafter, all loans irrespective of loan to value of the property attract a risk weight of 35 per cent.

*Loan to Value (LTV) ratio is the percentage of a property value that a bank is willing to give as home loan. 

Co-lending model:

The framework for the co-origination of loan arrangement involves joint contribution of credit at the facility level, by both the lenders as also sharing of risks and rewards between them for ensuring appropriate alignment of respective business objectives. The Reserve Bank had, in 2018, put in place a framework for the co-origination of loans by banks and a category of Non-Banking Financial Companies (NBFCs) for lending to the priority sector subject to certain conditions. Now it has been decided to extend the scheme to all the NBFCs (including HFCs). “The announcement to allow co-origination of loans to all NBFCs and HFCs for priority sector lending should help banks and NBFCs supplement each other’s strengths for improving credit flow to the underserved borrower segments. Extending the scheme to all the NBFCs would improve the flow of credit to the unserved and underserved sector of the economy, it has been decided to extend the scheme to all the NBFCs (including HFCs), to make all priority sector loans eligible for the scheme and give greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc, it said. The proposed framework will be called as “Co-Lending Model”. The revised guidelines will be issued by end of October 2020, it said.

While banks have a regulatory obligation to meet their priority sector lending targets, the NBFCs have played an important role in serving this segment. This would help transfer some liquidity from the banking system to the NBFCs and help improve overall credit flow,” the Statement on Developmental and Regulatory Policies of RBI reads.