Reserve Bank of India: Orders Banks to Link housing Loan Disbursal to Progress in Construction...

The Reserve Bank of India (RBI) has warned banks against disbursing housing loans directly to the developers / promoters without taking into consideration the stage of construction under special schemes such as the 80:20 or 75:25  or 10:80:10 plan. This, RBI warns, could lead to diversion of funds by the developer resulting in losses for the retail customers.

These are specialised schemes where the home buyer pays 20 % or 25% of the cost of the house upfront and the remaining portion is paid after a few years at the time possession.

Chennai based a senior banker who did not want to be quoted said, “Developers or promoters are contracting finance at individual rates through these schemes. And the developers are paying the interest on behalf of the customers until the building is constructed so there is no risk.” In some other schemes, the banks / housing finance companies will charge the interest portion  meant to have collected during the construction period  after the construction is completed, by charging a higher interest rate.

Many banks have introduced certain innovative home loan schemes in association with developers / or builders whereby 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 / promoters during the construction period / or specified period, etc. This often includes 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 such as 80:20 and 75:25 schemes.

Mr. Rajeev Talwar, Executive Director, DLF Ltd, said, “Not all projects of the developers / promoters are under these schemes and even if they are, it is completed as per the agreements. Builders / promoters are keen to complete the project & hand over the homes to the investors.”

In view of the higher risks associated with such lump sum disbursal of sanctioned home loans & customer suitability issues, banks are

advised that disbursal of home loans sanctioned to individuals should be closely linked to the stages of construction of the housing project / or houses and upfront disbursal should not be made in cases of incomplete / or under-construction / or  green field housing projects.

“Such home loan products are likely to expose the banks as well as their housing loan borrowers to additional risks, e.g, in case of disputes between individual borrowers and developers / or builders, default / or delayed payment of interest / or EMI by the developer / or builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc,” RBI said in a circular.

The central bank RBI  has cautioned that any delayed payments by developers / or builders on behalf of individual borrowers to banks may lead to lower credit rating / or 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.

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