Home loans bank on construction progress:RBI’s new format
In what has been considered as a bane for builders across the nation, the Reserve Bank of India has recently made an offbeat move that is making headlines all over. The RBI has
directed all the banks to refrain from upfront disbursal of home loans to developers, in order to put a nip in the bud to all additional risks for lenders and home loan borrowers.
The RBI has brought into notice of the potential home-loan borrowers and banks, about the possible pitfalls of ‘innovative loan schemes’ leading to upfront disbursal of home loans to developers in case of under-construction, complete or green-field housing units.
Funds diversification
When bank loans are shelled out upfront on behalf of a particular borrower in whooping amounts to developers, regardless of the construction stage, banks and borrowers are exposed to a higher risk. Banks experience disproportionately higher exposure and suffer the risk of fund diversion
Considering the risk involved in the lump-sum disbursement of home loans, RBI has advised banks that the disbursal of money to sanctioned borrowers should be directly proportional to the stages of construction of the housing unit. In addition, it has also advised banks to avoid upfront disbursal in case of under-construction, incomplete or green-field projects.
Subvention scheme
One of the common terms used by banks and loan borrowers, this scheme states that banks cannot disburse more than 80% of the total value of the asset. The loan amount is sanctioned on the basis of the eligibility of the individual customer. For home loans ranging between Rs 20 lakh- Rs 75 lakh, the LTV ratio stands at 80:20, however for loans above 75 lakh the ratio is 75:25.
Under this scheme, a home buyer is liable to pay 20-25% of the overall price, whereas the builders manage the rest of the required money from banks before the project sets off. Adding to the bad news, RBI further quoted that such type of home loans pose the threat of exposing banks and borrowers to additional risks.
Why CREDAI is against RBI’s new format?
In a move to give bad press to the decision taken by RBI, CREDIA, the real estate apex body, has revealed a viewpoint stating that the move by the central bank will affect the developer’s sentiments and business plans.
Banks or any housing finance institution , generally protect their interest while making such instruments. Sudden bailing out of circulars and directing the banks towards established methods will wear and tear the sentiment of the borrowers and muck up the business plan. This, consequently, will lead to a setback for the housing projects and affect the end users.
According to experts, before coming to a decision and generating circulars, RBI should have taken a piece of information from the stakeholders. RBI circulars has a past history of changing the good course of a market and affecting the real estate sector. Hence, prior consultation could have been fruitful since it focuses on customer stability and highlights the possible risk of borrowers.
The good news is, under the new scheme, developers will be restricted to divert 80% of their loan amount to different constructions and will have to adhere to the timeline as an attempt to keep the installments coming in. To add to it, the scheme will also aid banks to cut down their Non-Performing Assets burden and boost up the market sentiments.
