RBI reviews regulatory polices and takes some macroprudential measures

This should have been a part of the review of Q2 2010-11 monetray policy.  But as post got longer decided to take it in separate post. 

RBI has 4 monetary policy meetings and 4 mid-policy reviews. The monetary policy meetings are held in April, July, October/November and January in a financial year. In April and October/November meeting, RBI also reviews developments in regulatory space. It is a great reading and gives a nice overview of overall developments.

In Nov-10 policy review, RBI lists number of developments.

I would like to highlight the measure taken to limit excesses in loans to housing sector. These are macroprudential measures taken by RBI to mitigate build up of risks in this sector.

There are 3 measures:

Loan to Value Ratio in Housing Loans

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 `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 `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.

I thought there was a LTV ratio of 85%, so am surprised to hear there was none. Teaser rates should have been banned long ago.

Though, I think RBI has been very late on this. The excesses have already been done and are unlikely to be undone. You might have Rs 1 crore (100 million) budget to buy a house, but will struggle to buy one in Mumbai. And in this 1 crore budget you need around 35% as unaccounted money. Brokers tell you flat- no cash (unaccounted money), no deal.

So, though, RBI in its macro review says housing prices have risen in metros and are above their pre-crisis peaks. It has taken above action based on these trends.

The quarterly House Price Index (HPI) for various centres based on data collected from the Department of Registration and Stamps (DRS) suggests that property prices are picking up in most tier I cities though some slowdown is witnessed in tier II cities (Chart V.8a).

But RBI still is underestimating the total rise. As around 35-40% of deal money is unaccounted money, the real price rise is happening there. So earlier you paid 15-20% as unaccounted, now this goes to 35-40%. I don’t understand how Department of Registration and Stamps registers property at 60% of market prices. A plain question it should ask is if somethig costs Rs 100 how can you register it for Rs 60?

So, I think Adarsh Society scam is just a drop in the ocean. The entire property market needs reforms and some serious cleaning up. But who would do it? We are living in wonderland.

Apart from housing loans measures, there are some other measures as well:

Too Connected to Fail

As per Basel II framework, investments in the equity of subsidiaries or significant minority investments in banking, securities and other financial entities, where control does not exist, together with other regulatory capital investment in these entities are required to be excluded from the banking group’s capital if these entities are not consolidated. The Group recommended that the threshold of significant influence/investment may be fixed at 20 per cent instead of the present 30 per cent. Accordingly, it is proposed:

  • that the entire investments in the paid up equity of the entities (including insurance entities), where such investment exceeds 20 per cent of the paid up equity of such entities shall be deducted at 50 per cent from Tier I and 50 per cent from Tier II capital when these are not consolidated for capital purposes with the bank. In addition, entire investments in other instruments eligible for regulatory capital status in these entities shall also be deducted at 50 per cent from Tier I and 50 per cent from Tier II capital; and
  • the deductions indicated above will also be applicable while computing capital adequacy ratio of the bank on a solo basis.

111.    The capital adequacy requirement will be further calibrated after finalisation of the Basel III rules, as indicated earlier.

Intra-Group Transactions and Exposures in FCs

112.   In order to limit the inter-connectedness between the bank and other group entities, it is proposed:

  • to put in place an appropriate limit for such transactions and exposures, both for a single entity and on an aggregate basis for all other group entities.

113.    Detailed guidelines in this regard will be issued separately.

Market related measures

  • Financial Stabililty report was last issued in Jun-10. Next to be issued in Dec-10. And from now on FSR would be released in June and December
  • RBI plans to float a discussion paper on pros and cons of deregulating 3.5% rate on savings accounts
  • RBI plans to introduce Interest Rate Futures in 2 year, 5 year and 91 day T-bill securities. This was announced in APr-10 policy. Well, the 10-year IRF has been a disaster with just one contract trading in most of the days . Once again IRFs have failed to pick up (launched earlier in 2004 as well and dies within 2-3 weeks of launch). IT would have been better to review the current IRF market before getting into newer launches. If there is no trading for 10-year bond, dont see anything happening on others at all.
  • To permit settlement of repo in corporate bonds on a T+0 basis in addition to the existing T+1 and T+2 basis and revise the repo haircut requirements suitably.

Financial Inclusion measures

  • banks were asked to put in place a board approved three-year financial inclusion plan (FIP) and submit the same to the Reserve Bank by March 2010. Domestic scheduled commercial banks have since prepared and submitted their FIPs to the Reserve Bank. These plans have been discussed with major banks and revised plans based on the discussions have been submitted by banks. To closely monitor the progress made in implementation of these plans, a quarterly reporting format has been communicated to banks and the implementation of these plans is being closely monitored by the Reserve Bank.
  • To allow RRBs to open branches in Tier 3 to Tier 6 centres as identified in the Census 2001 (with population up to 49,999) without prior authorisation of the Reserve Bank, subject to their fulfilling certain conditions.
  • Roadmap for Provision of Banking Services in Villages with Population of over 2000. time line for provision of banking services has been extended to March 2012 from March 2011 in line with the Finance Minister’s announcement in the Union Budget 2010-11. March 2011 is retained as an intermediate target. The progress in the implementation of the roadmap is being discussed and closely monitored by respective SLBCs.

Several Committee reports to come up

  • Committee on Customer Service (Chairman: Shri M. Damodaran) was constituted to look into banking services rendered to retail and small customers, including pensioners. To submit report by end-January 2011
  • Expert Committee (Chairman: Shri Y. H. Malegam) was constituted in October 2010 with representations from all stakeholders for studying the advisability of granting licenses for setting up new urban co-operative banks. To submit report in next 6 months
  • Working Group to review the current operating procedure of monetary policy, including the liquidity adjustment facility (Chairman: Shri Deepak Mohanty).  The Group will submit its report in three months from the date of its first meeting.

Discussion Papers/Guidelines coming up

  • a discussion paper on the mode of presence of foreign banks through branch or wholly-owned subsidiary (WOS) would be prepared by September 2010. Accordingly, a discussion paper in consultation with the Government on the form of presence of foreign banks in India is in final stages of preparation.
  • To put the draft guidelines on new bank licences in public domain by end-January 2011.
  • To issue final guidelines on compensation practices by end-December


  • Enhancing corporate governance in banking organisations in line with Basel norms
  • RBI to take active interest in capacity building of Banks to gear them up for technology and IFRS standards
  • To increase the threshold limit for RTGS transactions from the present limit of Rs 1 lakh to Rs 2 lakh

There are others as well, I am exhausted reading the statement…

2 Responses to “RBI reviews regulatory polices and takes some macroprudential measures”

  1. What do you mean by Teaser Rates? « Mostly Economics Says:

    […] you mean by Teaser Rates? By Amol Agrawal In second quarter review of monetary policy (see this, this, and this as well), RBI took some measures to discourage teaser loans by Indian […]

  2. FinMin’s Economic Survey is fine with teaser home loan products « Mostly Economics Says:

    […] issue is this stance is contrarian to the stance by RBI.  In many previous posts (this, this, this and this) this blog has pointed RBI’s averseness to the product and its recent moves to […]

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