Loan to value ratio means Loan amount disbursed by the bank proportionate to the property value.In order to boost demand for low-cost housing loan (residential housing) sector RBI on October 10, 2015, reduced the risk weight for individual housing loans up to 75 lakh based on the Loan to Value ratio.The reduced risk weight would relax making the provisions on individual housing loans absorb any losses arising from the credit risks quantified under above methods. Therefore this move of reduction in risk weight (%) with revised Loan to Value ratio (LTV ratio) is expected to translate into cuts in lending rate on various categories of loan, as banks are relieved from making higher provisions on account of higher rn risk weight (%). The Loan to Value (LTV) ratios and risk weights for individual housing loans are fixed by RBI are as under:
Category of loan LTV ratio (%) Risk Weight (%)
Upto ₹ 30 lakh ≤ 80 35
> 80 and ≤ 90 50
Above ₹ 30 lakh and upto ₹ 75 lakh ≤ 75 35
> 75 and ≤ 80 50
Above ₹ 75 lakh ≤ 75 75
We may observe that the minimum risk weight for individual housing loans has been reduced from 50 per cent to 35 per cent based on Loan to value ratio. Earlier, all loans of up to Rs 20 lakh with LTV of 90 per cent had a risk weight of 50 per cent.The risk weight for commercial real estate remain unchanged at 100 per cent. Earlier, RBI vide its circular dated 06.03.2015 had notified that in cases where the cost of house/dwelling units does not exceed Rs.10 lakh, banks may add stamp duty, registration fee and documentation charges to the cost of the house/dwelling unit for the purpose of LTV ratio.