The Reserve Bank of India (RBI) on Friday came out with a new sub-section for residential housing projects from the commercial real estate (CRE) category (known as CRE-RH) that will attract lower risk weight and provisioning as compared to CRE loans, thereby ensuring more credit flow to the housing construction sector.

In a notification, the bank said: “CRE-RH segment will attract a lower risk weight of 75 per cent and lower standard asset provisioning of 0.75 per cent as against 100 per cent and 1 per cent, respectively, for the CRE segment.”

The reason envisaged by the apex bank was that loans to residential housing projects exhibited lesser risk and volatility than the broader commercial realty sector.  As the risk weight is lower, the interest rate would be lower too. So, it would enable builders to borrow at lower rates and bigger amounts for such projects, the notification said.
 
The move should help ensure more credit flow to the housing construction sector.  As the banking regulator, the RBI specified that CRE-RH segment would consist of loans to builders or developers for residential housing projects (except for captive consumption). Such projects should ordinarily not include non-residential commercial real estate.

All the same, the RBI has allowed integrated projects with some commercial space, which should not exceed 10 percent of the total floor space index.  In case the commercial area in a residential project exceeds 10 percent of the total floor space index, then it will be classified as commercial real estate and not as residential housing project. The central bank had stated in the Annual Monetary Policy 2013-14 that commercial real estate exposures are sensitive in view of their inherent price volatility. Therefore, these exposures should generally attract higher risk weights and higher provisioning requirement.

As such, the risk weight will differ for different loans under the CRE segment. As per the earlier norms, individual housing loans of up to Rs 20 lakh will continue to carry risk weight of 50 per cent, loan-to-value (LTV) of 90 per cent and provisioning of 0.4 per cent, while loans above Rs 20 lakh and up to Rs 75 lakh carry risk weight of 50 per cent, LTV of 80 per cent and provisioning of 0.4 percent. Individual housing loans above Rs 75 lakh will carry LTV of 75 per cent, risk weight of 75 per cent and provisioning of 0.4 per cent.