Housing Loans by Commercial Banks – LTV Ratio, Risk Weight and Provisioning

RBI No.2010-11/324
DBOD.No.BP.BC. 69 /08.12.001/2010-11

December 23, 2010

The Chairmen and Managing Directors/
Chief Executive Officers of
All Commercial Banks
(excluding Regional Rural Banks)
Dear Sir/Madam,

Housing Loans by Commercial Banks –
LTV Ratio, Risk Weight and Provisioning

Please refer to paragraphs 104 to 106 of the Second Quarter Review of Monetary Policy 2010-11 (extracts enclosed), proposing certain measures in regard to housing loans by commercial banks. Accordingly, banks are advised as under:

1. Loan to Value (LTV) Ratio

At present, there is no regulatory ceiling on the LTV ratio in respect of banks’ housing loan exposures. In order to prevent excessive leveraging, the LTV ratio in respect of housing loans hereafter should not exceed 80 per cent. However, for small value housing loans, i.e. housing loans up to Rs. 20 lakh (which get categorised as priority sector advances), it has been decided that the LTV ratio should not exceed 90 per cent.

2. Risk Weight

In terms of circular DBOD.No.BP.BC.83/21.06.001/2007-08 dated May 14, 2008 the risk weights on residential housing loans with LTV ratio up to 75 per cent are 50 per cent for loans up to Rs. 30 lakh and 75 per cent for loans above that amount. In case the LTV ratio is more than 75 per cent, the risk weight of all housing loans, irrespective of the amount of loan, is 100 per cent. Henceforth, the risk weight for residential housing loans of Rs. 75 lakh and above, irrespective of the LTV ratio, will be 125 per cent to prevent excessive speculation in the high value housing segment.

3. Provisioning

It has been observed that some banks are following the practice of sanctioning housing loans at teaser rates i.e. at comparatively lower rates of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective.  It has been also observed that many banks at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates. Therefore, in view of the higher risk associated with such loans, the standard asset provisioning on the outstanding amount has been increased from 0.40 per cent to 2.00 per cent with immediate effect. The provisioning on these assets would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’.

Yours faithfully,

(B. Mahapatra)
Chief General Manager –in-Charge

Encls: As above

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Housing Loans by Commercial Banks

Loan to Value Ratio in Housing Loans

104.   At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks’ housing loan exposures. In order to prevent excessive leveraging, it is proposed:

• that the LTV ratio in respect of housing loans hereafter should not exceed 80 per cent.

Risk Weights on Residential Housing Loans

105. At present, the risk weights on residential housing loans with LTV ratio up to 75 per cent are 50 per cent for loans up to Rs. 30 lakh and 75 per cent for loans above that amount. In case the LTV ratio is more than 75 per cent, the risk weight of all housing loans, irrespective of the amount of loan, is 100 per cent. Accordingly, it is proposed:

• to increase the risk weight for residential housing loans of Rs. 75 lakh and above, irrespective of the LTV ratio, to 125 per cent.

Teaser Rates for Housing Loans

106. It has been observed that some banks are following the practice of sanctioning housing loans at ‘teaser rates’, wherein the loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, it is proposed:

• to increase the standard asset provisioning by commercial banks for all such loans to 2 per cent.

Remarks by Smt Shyamala Gopinath, DG, RBI at the inauguration of Inter-Bank Mobile Payment Service of the National Payment Corporation of India at Mumbai on November 22, 2010

1. Mr Hota, Mr Balachandran, my colleague Mr Padmanabhan, other executives of NPCI, fellow bankers, other dignitaries and my media friends present here. I am honoured to be here and I thank the NPCI for inviting me to inaugurate the Interbank Mobile Payment Services (IMPS), which has the potential to change the retail payment landscape in India provided all the stakeholders get it right.
2. The success of mobile penetration in India is now widely recognized. This huge success has encouraged it being increasingly leveraged to address other frontier issues of inclusive growth process. Exchange of money, one of the most fundamental economic functions in any economy, is one of such frontline issues. I can do no better than refer to the observations  from a recent book¹ coauthored by  Mr. Sam Pitroda, one of the key architects of telecom revolution in India:  M-commerce is poised for a revolution, commencing in China and India.   It may initially focus on mobile banking and later, with integration of applications for consumer convenience, extend to other services.
3. Intuitively, the mobile phone, being more ubiquitous in nature offers a greater opportunity for effective delivery of financial services and furthering the cause of financial inclusion in a significant way.  With the evolution through Information & Communication Infrastructure, knowledge based initiatives, right to information and education, delivery of public services and employment and entrepreneurship mobile money has the potential to facilitate inclusive growth. .
4. Reserve Bank has acknowledged the importance of mobile banking channel as a critical element to achieving inclusive growth in India and has been taking several important steps, the recent being enabling the mobile companies to partner with banks as business correspondents. The twin challenge in our country would be to succeed in reducing the use of cash while encouraging the spread and use of mobile wallet to reap the full benefits of this ubiquitous product.
5. The three stakeholders viz. the telecom operators, banks and merchants have realized the value proposition and the only sustainable business model is where these stakeholders work together to deliver true value to customers and effectively share the costs saved and new revenues generated. Hence it is imperative that all the three while being cognizant of their strengths, do not lose sight of their weakness and find ways to integrate their offerings without losing their individuality.
6. As far as banks are concerned, the real challenge would be to reorient their business models to exploit the synergies provided by this model while addressing the key concerns.

• Leveraging on  new technology
  
• Extend the existing risk management practices to various delivery channels
  
• Acquire all these transactions over the existing settlement networks
  
• Aggregate various services as part of their existing cross-selling and co-branding initiatives
  
• Fraud prevention and security standards; safeguards against money laundering, KYC issues
  
• Ability to leverage their existing reporting, auditing, and campaign management at back end
  

Mobile Phones for financial services - across the globe
7. World over there has been increased use of mobile phones for extending financial services to the excluded populations.  Two models are mainly evident (i) bank led model and (ii) Non-bank led model.
8. The bank led model involves extending all banking facilities including money transfer facility to bank customers through the mobile channel. This pure bank led model essentially incorporates the whole gamut of financial services like acceptance of deposits, extending loans and also providing money transfer facility. The agents are employed by the banks and are therefore directly responsible for their activities.
9. The non-bank led model which are mainly provided by MSPs. A virtual electronic prepaid wallet on the mobile phone is provided to the customers. Customers can use the amount in the virtual account for remittance/payments for goods and services (M-Pesa, Kenya). The number of such models across the globe is very few. In this model the focus is on providing remittance facility. These models provide a virtual prepaid account held with  the MSP, which can be used by the customer for person-to-person remittance and payments.
10.  In India, it has been decided to adopt the bank-led model.
Mobile Payments in India :
11. The significance of this channel for the development of payment instruments and as payment channel has been recognized by the Reserve Bank. Accordingly the Reserve Bank of India issued the guidelines for Mobile Banking Transactions in October 2008.
12. The guidelines permit banks to provide mobile banking transactions and mandates that all transactions have to originate from one bank account and terminate in another bank account. The guidelines also permit banks to extend this facility through their business correspondents. The mobile banking guidelines were relaxed in December, 2009 to –

1. enhance the daily cap  on both funds transfers and transactions involving purchase of goods and services to Rs.50,000
   
2. Requirement of end-to-end encryption relaxed for transactions up to Rs.1000/- for small value transactions.
   
3. Facilitate funds transfer from a bank account using a mobile phone with cash payout at ATMs/BCs up to Rs 5000.
   

13. Non-bank entities have been permitted, in August  2009, to issue semi closed prepaid m-wallets up to the value of Rs 5000/- with full KYC compliance based on the representation received from Cellular Operators Association of India (COAI) The objective of keeping the limits low was to study the trend and progressively liberalize based on the experience. As on date a total of 6 non-bank entities have been authorized to issue prepaid mobile wallets. This includes one Mobile service provider. Another application is under process.
14. Given that India is still far from being a cash less society, the cash-in/cash-out arrangements in these models play an important part for scaling up. This can happen only if banks and mobile operators/card issuers work together as partners. It is gratifying to note that the high level of Inter-Ministerial Group anchored by the Department of Information Technology, Government of India that went into the issue, after extensive discussions, have reached more or less the same conclusion.GOI has consequently appointed various committees to address issues pertaining to provision of prioritized services for mobile banking transactions and pricing of such services.
15.  The recent relaxations contemplated in enabling mobile operators as BCs of banks should give a further fillip to these efforts.
16.  It has to be appreciated that in India, unlike in Kenya and Philippines, there are a number of    MSPs and a huge base of mobile subscribers. To have an efficient mobile based payment and remittance system would require inter-MSP payment services. This inter-operability is an important criterion for any payment product to be successful and acceptable. Facilitating this would require the setting up of a clearing and settlement arrangement for such non-bank operators. Such clearing and settlement arrangements could have systemic implications. This is where the facility being inaugurated today by the NPCI is filling an important pre requisite for the product to scale up.
17.  RBI has permitted 40 banks to do mobile banking and the customer base availing of mobile banking facilities as on September 30, 2010 stands at 8.87 lakh as compared to 6.16 lakh as at the end of August 2010. During September, 2010, 4.9 lakh transactions of value Rs. 44 crores were carried out  using this mode of payment both for transfer of funds and purchase of goods and services.
Concluding thoughts :
18. While the growth of mobile payments has been rapid, it is far from becoming an important source of financial inclusion. This in my view calls for two important facilitations. One, partnership rather than competition among the stake holders, importantly mobile companies and banks and two, a ubiquitous switch for enabling interbank p to p and p to b payments. While we are working towards achieving the first facility, NPCI has taken the important step of enabling the second important facility.
19. The Interbank Mobile Payment Services (IMPS) provides an inter-operable infrastructure to the banks for enabling interbank real time funds transfer transactions. What may be one of its strongest points, IMPS rides on the existing NFS Interbank ATM transaction switching infrastructure and message format – and hence easy for banks to adopt. It has the potential for the wide reach across the country when all NFS member banks adopt this service and promote this service aggressively.
20. Alongside this, with the recent relaxations in the BC guidelines, I believe that all the building blocks are in place. Now it is entirely up to the various stake holders to take the product forward.  More importantly, what has been facilitated by NPCI today can be construed as yet another step towards achieving its stated vision of becoming a true umbrella organisation for retail payments in this country. I hope NPCI will continue to show equal enthusiasm in commissioning and completing other important projects like the cheque truncation and the much awaited India Card.
21. I too join Mr Balachandran in congratulating the IBA, entire NPCI team and all others who have contributed to the roll out of this product. I wish the NPCI success in all their endeavors.

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Ministry of Finance Notification recognises Aadhaar number for Opening of Bank Accounts

A Ministry of Finance, Government of India, notification dated the 16 of December 2010 has recognized Aadhaar number issued by the Unique Identification Authority of India (UIDAI) as an “officially valid document” to satisfy the Know Your Customer (KYC) norms for opening bank accounts.

This notification is expected to promote the financial inclusion of the poor and the hitherto excluded by making it possible for them to easily establish their identity and open bank accounts.

The UIDAI is facilitating opening of bank accounts for the residents at the time of enrolment for Aadhaar through partner banks and acceptance of Aadhaar as a valid KYC will make the process seamless.

Employees may not be able to challenge CAT judgement in SC

Bad news is in store for government employees contesting matters relating to their service conditions in the Central Administrative Tribunal (CAT) as they may not be able to challenge the judgement in the Supreme Court.

Government employees not satisfied with CAT orders on their service matters will continue to appeal in High Courts as government's plan to enable them approach the apex court directly has received a thumbs down from the top law officer.

Recently, the Department of Personnel had asked the Law Ministry whether the present system of CAT orders being challenged in High Courts be changed to fast track disposal of cases of government employees relating to their service conditions and employment rules.

The Law Ministry referred the matter to Attorney General Ghoolam Vahanvati who opined against the move saying a 1997 Supreme Court judgement on the issue should continued to be followed.

"As of now, the buck stops here (on the issue)," Law Minister M Veerappa Moily told PTI when asked to comment on Vahanvati's opinion.

He said his ministry was trying to find a solution. "But I would not like to add anything more to it," he added.

When the CAT was established in 1985 by an Act of Parliament, its rules clearly stated that its judgements on service related matters of state and central government employees can only be challenged in the apex court.

While the same rules is in operation even today, a 1997 Supreme Court ruling held that judicial review is the basic feature of the Constitution and a High Court's power on judicial review cannot be taken away.

After the judgement, appeals against CAT rulings were entertained in High Courts.

"The Armed Forces Tribunal Act has been borrowed from CAT. Appeals against Tribunal's orders can only be challenged in the Supreme Court. But in CAT's case, it has become a three tier system...the entire purpose of CAT has been defeated," said a CAT functionary.

He said while CAT usually disposes off a case in six months, appeal in High Court often takes years.

"They pay Rs 50 as fee to move CAT, but they have to pay thousands of rupees in High Court...if the matter reaches Supreme Court, the time and cost involved is massive," he said

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Tribunal clears air on OBC job

New Delhi, Dec. 1 (PTI): The Central Administrative Tribunal has said the Centre will not reserve jobs for castes considered OBC by states but not by the Union government.

The tribunal passed the order on a petition by four members of the Jat community, recognised as an Other Backward Caste by the Delhi government, who sought appointment to posts reserved for OBCs in the Employees State Insurance Corporation, a central agency.

The petitioners pleaded before the tribunal that since the selection was to be made for the Delhi region, they, as Delhi residents, should be considered for appointment.

But the tribunal dismissed their petitions. The bench headed by V.K. Bali said: “In our opinion.... What is material is that the recruitment is being made for an agency of the central government.”

Departmental inquiry must before any stigmatic order: CAT

Express News Service Posted online: Wed Dec 01 2010, 04:47 hrs

Chandigarh : In a judgment with a far-reaching impact on employees serving on contract basis, the Chandigarh Bench of the Central Administrative Tribunal (CAT), headed by Justice S D Anand, has held that no contractual employee can be terminated by an order which is stigmatic in nature without holding a regular departmental inquiry. The order came on a petition filed by one Karamjit Singh, who worked as Director of Physical Education (DPE) in the Chandigarh Education Department on a contractual basis since August 2001. He was ordered to be terminated by the Education Secretary, UT Chandigarh, on July 23, 2009, on the allegation of resorting to corporal punishment to students while serving in Government Model Senior Secondary School, Sector 47, Chandigarh. Ranjivan Singh, counsel for the petitioner Karamjit Singh, argued that not only was the allegation against the petitioner - that he had resorted to corporal punishment to students on July 22, 2009 - false and baseless but no fair inquiry was held before holding the petitioner guilty. Thus, the termination of the petitioner was against the principles of natural justice, Singh contended. It was pointed out to the Bench that the termination of the petitioner was ordered despite the fact that the alleged victim students and their parents had approached the higher departmental authorities pleading the petitioner’s innocence. Setting aside the termination of the petitioner, the Bench allowed the petition filed by him whereby he claimed his reinstatement with effect from July 23, 2009, continuity of service and arrears of pay.

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