What motivates the
regulator to do these tweaks that keep the bankers at seat edge to keep
changing their pricing strategies? To name a few, present flow of credit into
the system and different types of loans like home loans, auto loans, personal
loans and so on, inflation levels, capacity of the sectors that absorb
this credit, to produce more and hence generate income at multiple levels or
simply raise prices to fuel inflation.
Let us assume that the regulator is immune to any lobbying here. If the auto sector manages to influence the regulator to make the regulatory capital allocation lower for auto loans, banks may reduce the interest rate on auto loans inducing more people to buy cars, thus helping the auto companies grow their sales and hence profits. We'll assume here that the regulator isn't moved by any such efforts.
Banks have varying levels of capital allocation to be made on home loans based on the extent of finance they provide on the cost that their lenders pay for the properties they buy. This ratio called the Loan To Value (LTV) is a common parameter that banker uses to ensure adequate security for their loans. Straight logic suggests that higher the loan amount or higher the LTV, higher is the risk demanding higher risk capital allocation. But who said straight logic works always in life, that too in the domain of high finance? While the straight logic remains the default position, the regulator doesn't remain glued to this position always. It is more like the RBI uses it as a metric to induce banks to lend more or less or price loans more or less, based on the priorities of the time.
So, we come to the point to this long preface. One such small tweak happened last month to help banks pump a bit of adrenaline into their home loan sales force during the festive season. RBI has removed[1] the linkage to the loan amount making the requirement simple - higher the LTV, higher is the regulatory capital allocation requirement. It is a flat 50% for home loans above 80% LTV and 35% for loans with LTV up to 80% ( banks are not expected to lend above 90% of the cost of acquisition of a property).
What does this mean to aspirant home buyers? Larger home loans should cost less as the blocked regulatory capital is reduced and consequently the capital cost component of the cost of home loan has reduced. Of course, this applies to only incremental disbursements, I.e. new loans.
So, go ahead, those looking to buy a bigger property, the cost of loan may just have reduced. Or has it? If your banker still fixes a higher interest rate for a larger home loan, rather, hasn't changed the interest rate for large value home loans, you may try your luck flagging this tweak to get her to give you an improvement.
Very enlightening.
ReplyDeleteVery easy to read useful article
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