RBI: Monetary, prudential steps’ tango helps cut home loan NPAs

Mumbai: Tinkering with the interest rate alone may not help with the repayment ability of home loan borrowers, according to a research paper supported by the Reserve Bank of India.

Prudential measures like risk weights and loan-to-value adjustments, along with interest rates, will be more effective in repayments of loans. This will also help in housing credit growth and controlling the asset quality of banks’ home loan portfolios, it shows.

“Banks’ capital adequacy had a positive impact on housing credit growth. Macroprudential policies and monetary policies were more effective when used in tandem. Macroprudential policies were not weakened by business cycle booms. While macroprudential policy alone did not seem to affect housing sector NPAs, tighter macroprudential and monetary policies in conjunction could help to reduce the NPA ratio in the housing sector,” said the research paper.

Macroprudential policies are aimed at ensuring the stability of the financial system. The paper evaluates the impact of such policies exclusively on the housing sector, which is one of the largest segments of retail credit in India, and assesses the impact on housing credit growth and non-performing assets using bank-level data.

The paper also explores how the stance of monetary policy as well as the economic cycle and the financial cycle can affect the impact of the macroprudential policy.The paper was written jointly by Amar Nath Yadav, Vivek Kumar and Jyoti Kumari of the RBI’s Department of Statistics and Information Management, along with external contributor Alok Kumar Chakrawal, who is the vice-chancellor of Guru Ghasidas Vishwavidyalaya, Chhattisgarh. The views in the report are not necessarily of the central bank.The paper uses the quarterly data of 51 major banks, covering an 18-year period till the third quarter of 2020. The analysis indicated that the macroprudential policies were effective in influencing housing credit growth.The repo rate and the growth of housing credit were negatively correlated. Moreover, when both macroprudential and monetary policies moved in the same direction, they had a stronger impact on housing credit growth.

“We observed that a tighter macroprudential policy decreased the NPA ratio, while an easy policy did not have a significant effect,” the authors said.

The RBI has deployed a variety of macroprudential measures for the housing sector, based on the evolving economic and financial cycles, and monetary policy settings. These included loan-to-value ratios according to the size and category of the loan (priority sector or non-priority sector loan), risk weights and standard provisioning. Changes to risk weights affect the capital ratio of banks, while provisioning affects their profits.

Stress tests, which are deployed for identifying potential vulnerabilities in the financial system, can guide the calibration of macroprudential policies within the regulatory toolkit, the authors said.

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