RBI’s September 2013 guidelines on Home Loans

RBI’s September, 2013 guidelines pertaining to Housing Finance Schemes
- On 3 September, 2013 the Reserve Bank of India (RBI) asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers. It also tried to contain the fallout of some innovative housing finance schemes.

- RBI in its notification to banks, clearly mentioned that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/house. This guideline was issued keeping in view the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues. RBI also asked banks to not to make available upfront disbursals for incomplete/under-construction/green field housing projects.

What are innovative housing finance schemes and risks associated with them that RBI targeted through these new guidelines?
- Some banks have of-late indulged in the so called “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 are popularly known by names such as 80:20 and 75:25 schemes. The RBI is of the view that such home loan products are likely to expose banks and their borrowers to additional risks. The risks include 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.