RBI Credit Policy: curbing flow of funds into real estate: IIFL

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RBI Credit Policy: curbing flow of funds into
real estate


RBI unveiled tighter lending norms to the real-estate sector in its
recent credit policy. Key policy changes impacting the real-estate
sector are:
• Loan-to-total flat value capped at 80% against no limit in old
policy - This would impact the recently launched deferred
payment schemes (10:90 scheme), as 20% of the total value
would now need to be borne by the buyer.
• Increase in risk weightages for loans above Rs7.5m to 125%
from 100% - This would increase costs for borrowers in this
segment by 50-150bps, assuming lending institutions do not
compromise on profitability.
• Higher provisioning norms for teaser rate home loans (to 2%
from 0.4% earlier) – This would end teaser rate schemes, in our
view.
• These norms would adversely affect fund flow for the real-estate
sector, and in turn, increase ownership costs for buyers.
• We expect these measures to adversely affect residential
transaction volumes, and in turn, slow down the rate of price
increases going forward.



• Key real-estate developers that will be impacted by this policy
include DLF, Unitech, HDIL, and Indiabulls Real Estate.
RBI has raised concerns on the increase in residential prices in key
metros and has accordingly tightened lending norms for the real-estate
sector in the new credit policy unveiled yesterday. These policies are
applicable on announcement of the policy. The key policy changes
impacting the real-estate sector are:
1) Loan-to-total value capped at 80% (no ceiling under old policy)
Under the old policy, there was no regulatory ceiling on the loan-tovalue
ratio (LTV) for mortgage loans. Some banks lent up to 90% of
the home value to the buyer. Under the new policy, RBI has capped
the LTV ratio at 80%.
This would impact the recently launched deferred payment schemes
in Central Mumbai (10% upfront, with the balance 90% to be funded
by the developer to the bank directly till the occupancy certificate of
the building is received), as 20% of the total value would now need
to be put up by the buyer.
2) Risk weightages for loans above Rs7.5m increased to 125%
from 100%
Under the old policy, the risk weightage for mortgages above
Rs7.5m was 75% if the loan-to-value ratio was less than 75%, and
100% if the loan-to-value was higher than 75%. This has now been
increased to 125% for all loans above Rs7.5m, irrespective of the
loan-to-value ratio.
We believe that this increase in risk weightage would increase the
cost for borrowers in the Rs7.5m+ loan category. We reckon that
the overall increase in rates for loans above Rs7.5m could be in the
range of 50-150bps, on account of higher risk weightage (assuming
lending institutions do not compromise on their profitability).
3) Provisioning norms for teaser rate home loans increased to
2% from 0.4%
RBI has increased provisioning norms for teaser rate loans to 2%
from the existing 0.4%. This increase in provisioning would end
teaser rate schemes, in our view. Teaser rates were more commonly
applicable for loans up to Rs5m.


Clearly, RBI wants to curb excess funds flowing into real estate. We
expect these measures to impact residential transaction volumes both
for the mid-income as well as the luxury segment and slow down the
rate of price increases, going forward.
Key real estate developers to be impacted by this policy include DLF,
Unitech, HDIL and Indiabulls Real Estate.