Financing Housing Projects
During the recent period, housing sector has emerged one of the biggest loan portfolios of banks. The focus of the RBI, therefore, is to ensure orderly growth of this portfolio. The Master Circular No.DBR.No.DIR.BC.13/08.12.001/2015-16 dated July 1, 2015 on Housing Finance provides guidance in respect of the housing finance provided by the banks. Banks could deploy their funds under the housing finance allocation in any of the three categories as per the norms provided in the Master Circular, i.e.
Direct Finance.
Indirect Finance.
Investment in Bonds of NHB/HUDCO, or combination thereof.
The Master Circular also contains a number of guidelines for this purpose, including conditions wherein a bank cannot extend credit for housing purposes. These conditions are as follows:
(i) In case of lending to housing intermediary agencies, the banks are required to ensure that the former have complied with the guidelines of the National Housing Board (NHB). In terms of the NHB guidelines, a housing finance companies’ total borrowings, whether by way of deposits, issue of debentures/ bonds, loans and advances from banks or from financial institutions including any loans obtained from NHB, should not exceed 16 times of their net owned funds. (i.e., paid up capital and free reserves less accumulated balance of loss, deferred revenue expenditure and intangible assets.)
(ii) Banks are also not permitted to extend fund based or non fund based facilities to private builders for acquisition of land even as part of a housing project.
(iii) Banks cannot grant finance for construction of buildings meant purely for Government/Semi-Government offices, including Municipal and Panchayat offices. However, banks may grant loans for activities, which will be refinanced by institutions like NABARD.
(iv) Projects undertaken by public sector entities which are not corporate bodies (i.e., public sector undertakings which are not registered under Companies Act or which are not Corporations established under the relevant statute) also cannot be financed by banks.
(v) In terms of the orders of the Delhi High Court, banks also can not grant loans in respect of:
Properties which fall in the category of unauthorised colonies unless and until they have been regularised and development and other charges paid.
Properties which are meant for residential use but which the applicant intends to use for commercial purposes and declares so while applying for the loan.
Loan to Value (LTV) ratio
In order to prevent excessive leveraging, the LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small value housing loans, i.e., housing loans up to Rs. 20 lakh (which get categorized as priority sector advances), the LTV ratio should not exceed 90 per cent.
The Master Circular RBI/2015-16/46/DBR.No.DIR.BC.13/08.12.001/ 2015-16 dated July 1, 2015 on Housing Finance, lays down that the following LTV ratios have to be maintained by banks in respect of individual housing loans.
Category of Loan |
LTV Ratio (%) |
(a) Individual Housing Loans |
|
Upto Rs. 20 Lakh |
90 |
Above Rs. 20 lakh & upto Rs. 75 lakh |
80 |
Above Rs. 75 lakh |
75 |
(b) CRE-RH |
NA |
The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction. In case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts should be made to bring it within limits.
Innovative Housing Loan Products – Upfront Disbursal of Housing Loans
It has been observed that some banks have introduced certain innovative Housing Loan Schemes in association with developers / builders, e.g. upfront disbursal of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project, interest / EMI on the housing loan availed of by the individual borrower being serviced by the builders during the construction period / specified period, etc. This might include signing of tripartite agreements between the bank, the builder and the buyer of the housing unit.
These loan products are popularly known by various names like 80:20, 75:25 Schemes.
2.171 Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks e.g. in case of disputes between
individual borrowers and developers / builders, default / delayed payment of interest / EMI by the developer / builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc. Further, any delayed payments by developers / builders on behalf of individual borrowers to banks may lead to lower credit rating / scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders / developers without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds.
2.172 In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project / houses and upfront disbursal should not be made in cases of incomplete / under-construction / green field housing projects.
2.173 It is emphasized that banks while introducing any kind of product should take into account the customer suitability and appropriateness issues and also ensure that the borrowers / customers are made fully aware of the risks and liabilities under such products.