Now, no big home loans over 80% of property value!

Concerned over excessive flow of banking funds to the real estate sector, the Reserve Bank of India on Thursday said lenders will provide loans only up to 80 per cent of the cost of property.

Following the RBI directive, a home buyer will necessarily have to arrange at least 20 per cent of the property value on his own before seeking loan from a bank.

In order to check speculation in the real estate sector, the central bank has made it tougher for banks to provide high value loans for properties costing more than Rs 75 lakh (Rs 7.5 million), besides raising the provision requirement for loans provided at 'teaser rates'.

"In order to prevent excessive leveraging, the LTV (Loan to Value) ratio in respect of housing loan hereafter should not exceed 80 per cent," the Reserve Bank said in a notification.

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However, in case of small value housing loans up to Rs 20 lakh (Rs 2 million), banks can provide loans up to 90 per cent of the property value, the central banks said, adding such loans are part of priority sector advances.

In absence of any LTV norms, banks have been providing liberal loans for buying homes, going up to 90 per cent of the asset value.

In order to curb the practice of alluring home buyers by offering cheaper rates for limited period, RBI raised the provisioning requirement for banks for teaser rates from 0.4 per cent to 2 per cent with immediate effect.

Under the revised norms, the banks will have to set aside more capital as provision against home loans given at teaser rates.

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Some banks including ICICI Bank, HDFC has already withdrawn their teaser rates scheme, while SBI's scheme would continue till this month.

The announcement follows the concerns expressed by RBI Governor D Subbarao in his half-year review of the Monetary Policy in October.

The decision, the RBI said, is aimed at "preventing excessive speculation in the high value housing segment."

The RBI measures, said a senior official of the Bank of India, would dissuade banks from providing advances that fuels speculative activity in the real estate sector.

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As regards the high value properties, the central bank said, the risk weight for housing loans above Rs 75 lakh would be 125 per cent.

The risk weight refers to the capital which the banks have to set aside against outstanding loans to meet the capital adequacy norms. Currently, as per the Basel-II norms, banks have to maintain a capital adequacy of 9 per cent.

For high value home loans the banks will now be required to set high aside more capital to meet the capital adequacy norms prescribed by the central bank.