The recent guidelines on loan-to-value ratio and higher provisioning may help curb speculation in the property markets and even result in easing of prices, National Housing Bank Chairman and Managing Director R V Verma said on Wednesday.
“Possibly, it may help in bringing down home prices but immediately it (norms) may result in transfer of costs in the system,” Verma said. “In fact, the cost of providing or issuing capital may get factored into the price by the lending stations and if the cost goes up it can impact the flow of demand. If the demand comes down then prices may also come down or may be corrected from current levels.”
Verma said the norms had been essential as across housing categories, there was “too much of funds” coming into the housing sector and if construction did not happen then it could lead to overheating and make the sector unstable.
“The norms were in order to bring uniformity and the competition does not drive housing finance companies to an edge of lending 100 per cent of loan to value, which can be invariably very risky,” he said. He pointed out that if property value fell, then the default in such a case would be very high.
Verma said the norms would bring some uniformity and discipline into the housing finance market. On December 24, National Housing Bank tightened norms for housing finance companies and said they cannot disburse home loans of up to Rs 20 lakh with a loan-to-value ratio exceeding 90 per cent. The regulator of home finance companies has capped the loan-to-value ratio for all housing loans above Rs 20 lakh at 80 per cent.
Companies will also have to set aside 2 per cent of the outstanding amount of teaser loans as provisions. For other housing loans, the NHB has mandated provisioning of 0.2 per cent by March 31 and 0.4 per cent by September 30.
NHB also increased the risk weightage on housing loans with a loan-to-value ratio of up to 75 per cent and given against mortgage of immovable property to 75 per cent from 50 per cent earlier. It increased the risk weight on home loans above Rs 7.5 lakh to 125 per cent from 100 per cent, irrespective of the loan-to-value ratio.
Verma said the idea behind the norms was to disincentivise housing finance companies from giving loans above Rs 75 lakh.
“So clearly that market is speculative and there are lot of investors in that market and it is not a stable market, prices can fluctuate very widely and if the potential risk is high then the lender will have to provide for the risk,” he said.
