The Reserve Bank of India (RBI) monetary policy committee (MPC) decided to keep the repo rate unchanged at 4%. The central bank said it will have an accommodative stance as long as it will be required for growth. The newly-constituted MPC of the RBI unanimously voted for a no revision in the key rates and also announced a slew of measures to ensure that lending continues to get easier and cheaper, especially to priority sectors such as real estate, in order to drive economic activity.
The RBI’s latest move will help individuals and small businesses to now borrow bigger. This may also keep the costs of borrowing low as well.
Here are the key takeaways that may impact your personal finances:
Home Loans Risk Weight To Be Linked To Loan To Value
In a welcome move, the RBI decided to revise the housing loan risk weight rules to boost the real estate actor. Acknowledging the role of real estate sector in contributing to economic activity and job creation, the RBI announced that it will rationalize the risk weights and link them to loan to value (LTV) ratios for home loans sanctioned up to March 31, 2022. At present, the differential risk weights are applied to individual loans based on the LTV and size of the loan. Here is how this will affect you as a borrower:
As per current regulatory norms, banks need to set aside a minimum reserve against a loan. This amount is calculated based on the risk weight of the loan. Until now, the RBI had a more staggered risk weights system for home loans, which depended on the loan size as well as the LTV. For instance, in case of home loans below Rs. 30L, loans with LTV of 80% or less had a risk weight of 35% while loans with LTV ratio less than or equal to 90% had a risk weight of 50%. On the other hand, for home loans above Rs 75 lakh, the risk weights were set at flat 50%, and for loans between Rs.30-75L with an LTV of 80% or less, the risk weights were set at 35%. The risk weights have now been rationalised to consider only the LTV for home loans issued until 31 March 2022. So, during this period, the risk weight for all home loans with an LTV of 80% or less has been set to 35% and the risk weight for all home loans with an LTV between 80% and 90% has been set to 50%.
The RBI’s latest move on risk weight may translate into a lower capital charge as the regulator allows banks to allocate lower capital against the loans based only on the LTV especially in case of high-value loans. This will provide more capital for the banks to lend, which can lead to lower interest rates, and act as a further fillip to buyers looking to invest in property.
RTGS Facility To Be Round The Clock
Giving a big boost to the payments mode, the RBI announced that Real Time Gross Settlement or RTGS system of funds transfer will now be available 24X7 for customers from December 2020. Currently, the facility is available during working hours of banks. The move is expected to ease money transactions. RBI Governor Shaktikanta Das said, “India will be among very few countries globally with a 24X7X365 large value real-time payment. This will facilitate innovations in the large value payments ecosystem and promote ease of doing business.” The RTGS systems allows you to transfer minimum Rs. 2 lakh and there is no cap on maximum transfer amount.
Bigger Retail Loans
Retail and small business loans can now be up to Rs. 7.5 crore from the earlier limit of Rs. 5 crore. The new limits will apply to new loans as well as on incremental exposures on existing loans. This step will allow individuals and small businesses to take bigger loans for their ongoing needs.
TLTRO To Boost Lending
In a bid to boost liquidity and revive activity in specific sectors, the RBI decided to conduct on tap TLTRO with tenure up to three years for a total amount of up to ₹1,00,000 crore at a floating rate linked to the policy repo rate. The new TLTRO would allow banks to borrow at low costs and lend to corporates in specific sectors in order to stimulate liquidity, productivity and economic growth. While no repo rate cut was provided, this step would ensure that the banking systems will have adequate low-cost funds for lending.
Impact On Debt & Equity Investments
The RBI expressing its intention of buying government bonds and announced a Rs. 1 lakh crore TLTRO aimed at corporate debt. This would boost the bond market sentiment as reflected in a 10 basis point fall in the 10-year bond yield. The equity markets have also reacted positively with the announcements as seen in the uptick in key indices. That said, these announcements are aimed at easing ongoing economic challenges. Investors shouldn’t be guided by short-term thinking. Rather they should invest to a long-term plan that allows them to get the best out of both equity and debt investment options.
Impact On FDs
The Reserve Bank of India’s latest announcement to keep the repo rate unchanged at 4% after it has reduced the key policy rate by 115 basis points in 2020 will not bring much cheer to the FD investors who have been concerned about the prevailing low rates of bank deposits for a while now. However, at a time when capital protection has become as important as capital appreciation, risk-averse investors would be well-advised not to look away completely from deposits despite the low interest rates on offer. To maximise their FD returns, they may want to explore high-quality corporate debt as well as deposits with small finance banks where they may get up to 2.2% higher than the rates being offered by large banks. The key is to diversify and ladder the deposits in order to optimize risks, rewards and liquidity. Most importantly, investors should also explore other avenues like equity mutual funds and gold according to their returns expectations, risk-taking ability and liquidity requirements for higher returns or to provide additional stability to their portfolios.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.
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