RBI asks banks to link home loans to stages of property construction

RBI asks banks to link home loans to stages of property construction

 PTI   Mumbai     Last Updated: September 3, 2013  | 00:00 IST
Banks told to link home loans to construction

The Reserve Bank of India (RBI) has asked banks to link the disbursal of home loans to stages of the property's construction to protect the interests of buyers and contain the fallout of "innovative" housing financing schemes.

"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...," an RBI notification said.

Upfront disbursal "should not be made in cases of incomplete/under-construction/green field housing projects," the central bank said.  

The notification follows the introduction by some banks of "innovative housing loan schemes" in association with developers/builders, where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction.

Also, under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period. These loan products, the RBI said, are popularly known by names such as 80:20 and 75:25 schemes.

RBI said such home loan products are likely to expose banks and their borrowers to additional risks, including disputes between borrowers and builders; default and delayed payment of interest/EMI by the builder on behalf of the borrower, and non-completion of the project on time.

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