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RBI’s latest boost (or bust?) to real estate

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PTI reports the latest RBI move to “boost” an already over-valued real estate market by lowering risk weights on select home loans ( up to 75 lakhs) and consequently higher Loan-To-Value ratio by up to 90%. To quote the article on Firstpost:

“the banking regulator said in the case of ‘individual housing loans’ falling under the category of up to Rs 30 lac, the LTV ratio would be up to 90 percent. Earlier, the facility was available only in cases where the cost was up to Rs 20 lac.

For properties above Rs 30 lac and up to Rs 75 lac, the LTV will be up to 80 percent and those above Rs 75 lakh, it will be 75 percent.”

So, basically banks can end up with a loss on their loans even with a 10% decline in value of the real estate for properties below 30 lac. Decline of 20% and 25% would have the same effect for loans between 30 lac to 75 lac and above 75 lac respectively.

So in India we have small value gold loans (with a maturity of less than 1 year) having a Loan-To-Value ratio of 75% and high value long term (20-25 years) with a LTV of up to 90%. The only reason being that gold is traded on exchanges and price of gold is easily determinable and gold is a liquid market, on the other hand there is no reliable way to calculate the value of real estate leave aside ability to determine its value on a daily basis as real estate is a low liquidity market (with builders refusing to bring down prices even if there is no buyer). So according to RBI if you have no reliable way to determine the value of an asset class it deserves higher LTV ratio,implying it is less risky.Indeed for RBI, Ignorance is bliss !

Our take: RBI just bought the banks front row tickets for any collapse in the real estate market and so a big thumbs down from us!

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