Monday, June 24, 2013

RBI cuts risk weight for residential project loans.

The Reserve Bank of India (RBI) has carved out a sub-section for residential housing projects from the commercial real estate (CRE) category.

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.


Thursday, June 6, 2013

Globally: Possible Bubble Burst.

Credit: Overvalued doesn’t apply to the US, but does apply to Europe. Rapid adjustment potential is possible for both. “We have been worried for long by the fact that liquidity simply vanishes during volatile periods,” say UBS strategists. The timing on this is down to the QE exit for the Fed, which UBS says will turn into “absolute negative returns in credit, which could trigger a sell-off.
Hence,  credit space valuations do not look unreasonably stretched but the lack of liquidity in the market could engineer an adjustment that looks like a bubble bursting, the report argues.
Real estate in Asia: Too much cheap money flowing around is bound to find its way into real estate. While UBS has singled out Hong Kong as a bubble waiting to burst, the same is true for Indian property as well.
UBS believes physical real estate in Asia is a bubble waiting to burst, especially in Hong Kong which experienced a rapid increase in price. Since the dip in late 2008, the Hong Kong market has gained 123%, a 28% annualised gain. Since mid 2003, it has gained 305%, a 32% annualised gain. UBS blames low interest rates for this rise in property prices.
“In March this year, 76.5% of the mortgage loans had an interest rate between 2% and 2.25%”. In Singapore too prices have inflated due to low mortgage rates.
UBS believes that when the Fed reduces its QE asset purchases and raises rates, this will have direct repercussions on the cost of funding in Asia, notably for HK real estate. The first quarter of next year is the expected time this pop will happen.
Australian banks: Valuations are very stretched, says UBS due to an increase in risk in their business model. There are several triggers that could pop this market such as a correction in the housing market, funding problems, a downgrade of the Australian sovereign or a general sell-off in risk free rates on the back of the Fed’s exit strategy. However, none of these triggers seems likely in the immediate future.
“The hunt for yield and good fundamentals are likely to support OZ banks in the future but the materialisation of one of the triggers identified could prompt the correction. Here too QE exit could play an important role.”