HFCs react positively to lowering of risk weights on home loans

The shares of major housing finance companies reacted very positively to RBI’s move of lowering the risk weights on housing loans. The central bank announced that it has eased risk weights on individual home loans, a move that will result in lower provisioning by the financers for these loans.

Basically, financers of housing loans are required to keep a minimum capital against a loan. This provision is calculated on the basis of the risk weight of the loan category, which is based on the loan size or as the percentage of loan amount disbursed. Now, with the regulatory rule reducing these weights, financers can allocate lower capital against the loans. This step by the central bank comes as a direct beneficiary to the banks and HFCs as additional capital availability would result in a higher margin for new lending. This can also result in the increased capital adequacy ratios, resulting in a good credit rating score.

As per the announcement, all individual housing loans shall have a risk weight of 35 per cent, if their loan-to-value ratio is at 80 per cent or lower. The term, loan-to-value ratio, means the percentage of the amount financed when compared to the value of the property. For loan types with an LTV ratio is higher than 80 per cent but less than or equal to 90 per cent, the risk weights will be higher at 50 per cent. This benefit will be available for new housing loans only until March 2022.

HDFC gained 4.1 per cent to Rs 2,029, LIC Housing Finance gained 10.7 per cent to Rs 317.6, and Can Fin Homes gained as much as 8.7 per cent to Rs 478.7.