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Non-banking financial companies (NBFCs) have urged the Reserve Bank of India (RBI) to reconsider the current risk weights applied to loans against property, stating these loans are significantly more secure than unsecured lending. They argued that such loans are asset-backed and pose a lower credit risk, yet face disproportionately high capital provisioning requirements compared to home loans. NBFCs also pointed out regulatory inconsistencies in recovery rights and loan classification norms that they believe place them at a competitive disadvantage.
During a recent meeting with the Central Bank, NBFCs requested that the risk weights for loans against property be brought in line with those of home loans, which currently range from 35 to 50 percent. In contrast, loans secured against property face a 125 percent risk weight, despite being collateralised and historically demonstrating lower default rates. Lenders conveyed that this regulatory approach was overly conservative and did not reflect the underlying asset quality. Advertisement
They also raised concerns over the loan-to-value (LTV) ratio restrictions, which they said were stricter for property-backed loans compared to home loans. They suggested that aligning the LTV norms would bring parity and reflect the actual risk involved. Another key issue raised was the disparity in enforcement provisions under the SARFAESI Act.
NBFCs highlighted that housing finance companies are allowed to initiate security enforcement on loans above INR 1 lakh, while NBFCs can do so only for loans exceeding INR 20 lakh hindering their ability to recover dues efficiently.
Additionally, the lenders requested that the RBI permit refinancing of self-construction loans once over 50 percent of the building is complete. They noted that, unlike housing loans for under-construction projects-where the title is transferred only after possession property-backed loans often come with pre-available title deeds, making them less risky.
They maintain that loans backed by property carry lower credit risk and deserve more favourable treatment under RBI norms. If the central bank adopts these recommendations, it could lead to improved capital efficiency for NBFCs, increased access to secured credit, and better risk-based pricing. The proposed changes aim to encourage fair competition across the lending ecosystem while ensuring prudent risk management.
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