Home loans for amounts upto Rs 30 lakh may become cheaper. That's because the Reserve Bank of India (RBI) has reduced the risk weight -the amount of capital set aside for a loan--on home loans above Rs 20 lakh and upto Rs 30 lakhs to 50 per cent from 100 per cent earlier." Banks may want to pass on the benefit to customers in the form of lower interest rates.

Explaining the rationale for the move, Y V Reddy, governor RBI, said the idea was to give softer treatment to housing. This move, Reddy said, "was initiated with an aim to give relief to the large middle class.'' No banks have announced a rate cut yet: both public and private sector banks are weighing their options.

"Banks offer a different rate of interest on loans upto Rs 20 lakh than they do for loans bigger than that. With the RBI reducing the risk weight on home loans between Rs 20 lakh- Rs 30 lakh the lower rate will be extended to the consumers and the relief could be to the tune of 50 basis points,'' said M V Nair, chairman and managing director, Union Bank of India [Get Quote].

Bank of India, executive director, K R Kamath said "We will have to take an overall view on passing on benefit, of the lower capital required, for big ticket loans. There is already pressure on the lending rates because of the series of hikes on cash reserve ratio (CRR) which has left banks with less money to lend and has also increased our cost of funds.''

Chanda Kochhar, joint MD and CFO, ICICI Bank [Get Quote] said,"Interest rate are sensitive to liquidity conditions and also the cost of money. The risk weight plays a smaller role while deciding interest rates to be charged." 

"Reducing rates will be a very bank specific decision and  will depend on each one's liquidity position. There has been a tight clampdown on real estate loans and the RBI move will give some relief to the common man,'' said Meera Sanyal, country executive, ABN Amro Bank.

In May 2007, the RBI had reduced the risk weight on housing loans for up to Rs 20 lakh from 75 per cent to 50 per cent. Currently, home loans upto Rs 20 lakh qualify as priority sector loans.

Rising home loan rates have lead to a slowdown in  the growth of home loans over the past year. The home loan portfolio of banks grew at just 12 per cent between April, 2007 and February 15, 2008  ----Rs 26,930 crore as on February 15, 2008) as compared to 25.8 per cent growth (Rs 46,019 crore) in the corresponding period  of the previous year.

The Monetary and Credit Policy 2007-2008
Inflation, the silent killer!