The new section — CRE-RH — will attract lower risk weight and provisioning as compared with CRE loans, ensuring more credit flow to the housing construction sector.
“CRE-RH segment will attract a lower risk weight of 75% and lower standard asset provisioning of 0.75% as against 100% and 1.00%, respectively, for the CRE segment,” said the central bank.
The reason being loans to residential housing projects exhibited lesser risk and volatility than the broader commercial realty sector.
Since the risk weight is lower, the interest rate would be lower too. This would enable builders to borrow at lower rates and bigger amounts for such projects.
The move should help ensure more credit flow to the housing construction sector.
The banking regulator specified that CRE-RH segment would consist of loans to builders or developers for residential housing projects (except for captive consumption). Such projects should ordinarily not include non-residential commercial real estate.
However, the RBI has allowed integrated projects with some commercial space.
The commercial space should not exceed 10% of the total floor space index.
In case the commercial area in a residential project exceeds 10% of the total floor space index, then it will be classified as commercial real estate and not as residential housing project.
RBI had mentioned in the Annual Monetary Policy 2013-14 that commercial real estate exposures are sensitive in view of their inherent price volatility. Therefore, these exposures generally attract higher risk weights and higher provisioning requirement.
Accordingly, the risk weight will differ for different loans under the CRE segment. As per the earlier norms, individual housing loans of up to Rs 20 lakh will continue to carry risk weight of 50%, loan-to-value (LTV) of 90% and provisioning of 0.4% while loans above Rs 20 lakh and up to Rs 75 lakh carry risk weight of 50%, LTV of 80% and provisioning of 0.4%. Individual housing loans above Rs 75 lakh will carry LTV of 75%, risk weight of 75% and provisioning of 0.4%.
RBI said that the LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction. In case, the LTV ratio is currently above the ceiling prescribed for any reasons, efforts shall be made to bring it within limits, said RBI.