RBI Rationalizes Risk Weights for HFCs

In a significant move, the Reserve Bank of India (RBI) has revised the risk weight guidelines for undisbursed home loans, offering relief to Housing Finance Companies (HFCs) vide circular dated August 12, 2024.

The RBI has decided to cap the risk weights for undisbursed loans at levels equivalent on a notional basis to those of disbursed loans. Additionally, the RBI has updated the risk weights for Commercial Real Estate/ Residential Buildings. For fund-based and non-fund-based exposures to such properties classified as standard, the risk weight has been set at 75%. However, for non-standard exposures in this category, the risk weight will follow the ‘Other Assets (Others)’ category, currently set at 100%.

The revised guidelines, effective immediately, are expected to streamline risk management practices across the housing finance sector, promoting a more efficient allocation of capital. HFCs will now be able to allocate resources more effectively, boosting their ability to finance housing projects and meet the growing demand for home loans.

However, rating agency Icra reports the notified changes are unlikely to have any material impact on the deposit accepting HFCs given the already adequate on-balance sheet liquidity available and their deposits also being within the prescribed ceiling.