Builders and perspective buyers of housing finance have got an early Diwali gift from the Reserve Bank of India (RBI). Banks and non-banking financial institutions have been hesitant to grant loans to the real estate sector citing the risk beyond the pandemic, while buyers have also remained financially troubled. The Central Bank has announced certain proposals to ease lending to participants in the real estate sector as an early Diwali gift.
To ease the financial crisis, RBI said that they had decided to rationalize the risk weights and connect them with the loan-to-value ratio only. This revised plan is applicable for all new housing loans permitted up to March 31, 2022. The new plan is against the usual execution of differential risk weights based on the size of the loan as well as the loan-to-value ratio.
It has been said that RBI’s plan to rationalize risk weightage on home loans and connecting the housing loan risk only to ‘loan-to-value’ is a welcome move. This declaration will motivate banks to lend more to the individual homebuyers without having any pressure on their balance sheets. RBI also believes that the measure is anticipated to give a stimulus to the real estate sector, as it is considered to be one of the biggest generators of employment and economic activity.
In rural areas, banks have limited reach, so they are often hesitant to grant loans to small businesses or builders. However, the Non-Banking Financial Companies (NBFCs), who have one-to-one relations with them, had come forward to provide loans. So, in 2018 when NBFCs were grabbing for liquidity, RBI permits some of them to collaborate with other banking institutions. The idea behind this collaboration was to use the latter’s expertise and vast pool of money and their close relations to co-lend to the selected priority sectors.
Now, the central bank had expanded the ‘co-lending model’, where the NBFCs and banks collaborate to disburse loans, thus minimizing risks for both of them. RBI firmly believes that this co-lending model will strengthen the comparative dominance of banks and NBFCs in a collaborative effort. It will also help to improve the flow of credit to the unserved and underserved divisions of the economy.