Housing finance plays a pivotal role in shaping the socio-economic landscape of any nation, serving as a catalyst for infrastructure development, economic growth, and social stability. Recognizing this significance, the Reserve Bank of India (RBI) has laid down comprehensive guidelines to regulate and streamline the housing finance sector. These guidelines are aimed at fostering responsible lending practices, mitigating risks and ensuring the availability of affordable housing to all segments of society.
The RBI’s guidelines cover various aspects of housing finance, including loan quantum, innovative loan products, approvals from regulatory authorities, disclosure requirements, exposure limits, priority sector lending, and financing of affordable housing. By providing a clear framework, the RBI seeks to promote transparency, accountability, and sustainability in the housing finance ecosystem, thereby safeguarding the interests of both borrowers and lenders.
Following is the gist of the guidelines on the subject:
These guidelines are in the form of statutory directive issued under Sections 21 and 35 A of the Banking Regulation Act, 1949. This Master Circular consolidates and updates all previous instructions contained in circulars listed in the appendix, along with clarifications issued. It applies to all Scheduled Commercial Banks, excluding Regional Rural Banks in India.
Banks must adhere to RBI guidelines to ensure credit is used for productive construction activities and not for real estate speculation. Regulations cover acquisition of land, construction of buildings, ready-built houses, slum improvement schemes, and supplementary finance. Specific conditions are outlined for loans related to repairs, alterations, and additions to houses, as well as for projects financed by public sector entities.
The guidelines regarding the construction of buildings or ready-built houses issued by the Reserve Bank of India outline the permissible scenarios for banks to grant loans to individuals
- RBI guidelines clarify that Bank finance can be granted only for purchase of a plot, provided a declaration is obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks.
- Loans for Dwelling Units: Banks are permitted to grant loans to individuals for the purchase or construction of a dwelling unit per family. Additionally, loans for repairs to damaged dwelling units of families are also allowed.
- Second House Construction: Individuals who already own a house in a town/village where they reside can obtain finance for constructing a second house in the same or another town/village for self-occupation.
- Rental Basis Purchase: Banks may extend finance for the purchase of a house by a borrower who intends to let it out on a rental basis due to reasons like postings outside the headquarters or employer-provided accommodation.
- Purchase of Old House: Finance can be provided to a person intending to buy an old house where they currently reside as a tenant.
- Slum Area Improvement: Credit may be extended directly to slum-dwellers for construction meant for improving conditions in slum areas, either on the guarantee of the Government or indirectly through State Governments.
- Slum Improvement Schemes: Banks can provide credit for slum improvement schemes implemented by Slum Clearance Boards and other public agencies.
Conditions for Adherence: Banks are advised to adhere to certain conditions in light of observations by the Delhi High Court on unauthorized construction. These include obtaining sanctioned plans for construction, ensuring compliance with building regulations, obtaining completion certificates, and refraining from financing properties in unauthorized colonies or those intended for commercial use when applied for residential loans.
These guidelines ensure that banks extend loans for housing purposes within regulatory frameworks, promoting compliance with building regulations and protecting both lenders and borrowers from potential risks associated with unauthorized construction or usage.
Supplementary Finance
- Banks may consider requests for additional finance for alterations, repairs, and additions to financed properties.
- Finance may be extended against additional security, including paripassu or second mortgage charge over the property.
Restrictions on Financing
- Banks should not finance construction purely for government offices or projects by public sector entities including Municipal and Panchayat offices. However, banks may grant loans for activities, which will be refinanced by institutions like NABARD.
- Banks should satisfy themselves that the project is run on commercial lines.
- Loans to projects with government subsidies should be limited to the amount not covered by subsidies or government contributions.
- Financing projects reliant on budgetary allocations, such as those for employee housing, is not recommended.
These guidelines aim to ensure responsible lending practices and promote the productive use of credit in the housing sector while safeguarding against speculative activities.
Lending to Housing Intermediary Agencies
Financing of Land Acquisition:
- Banks can finance public agencies (not private builders) for land acquisition and development as part of complete projects, including infrastructure development.
- Valuation of properties and collaterals should be done by professionally qualified independent valuers.
- Valuation of land for financing should be limited to current market price plus development cost.
- Banks should have a Board approved policy in place for valuation of properties including collaterals accepted for their exposures and that valuation should be done by professionally qualified independent valuers.
Lending to Housing Finance Institutions
- Banks can grant term loans to housing finance institutions based on factors like debt-equity ratio, track record, and recovery performance.
Lending to Housing Boards and Other Agencies
- Banks can extend term loans to state-level housing boards and public agencies, ensuring past recovery performance and regular loan instalment recovery.
Term Loans to Private Builders
- Banks can provide credit to private builders for specific projects on commercial terms but cannot fund land acquisition.
- Loans must be based on project-specific terms, monitored closely to prevent speculation in land, and ensure reasonable pricing.
- Care should also be taken to see that prices charged from the ultimate beneficiaries do not include any speculative element, that is, prices should be based only on the documented price of land, the actual cost of construction and a reasonable profit margin.
Terms and Conditions for Lending to Housing Intermediary Agencies
- Banks can grant term loans to housing intermediary agencies against direct loans sanctioned, including those to Non-Resident Indians (NRIs), ensuring RBI authorization for housing loans to NRIs.
- Banks can grant term loans to housing intermediary agencies against the direct loans sanctioned/proposed to be sanctioned by them to Non-Resident Indians also.
Adherence to guidelines on Commercial Real Estate (CRE) exposure
- Lending to housing intermediary agencies must comply with RBI guidelines on classification of exposures as commercial real estate and provisions regarding residential housing within CRE.
Quantum of loan
Loan to Value (LTV) and Risk Weights
- For individual housing loans, banks must follow specified LTV ratios and corresponding risk weights based on loan amount categories.
- For loans above INR 30 lakh and up to INR 75 lakh, LTV ratios determine the risk weight, with higher loan amounts having lower LTV ratios and higher risk weights.
- Commercial Real Estate – Residential Housing (CRE-RH) loans have a fixed risk weight of 75%.
- Counter cyclical measures introduced for individual housing loans sanctioned between October 16, 2020, and March 31, 2023, adjust risk weights based on LTV ratios.
Exclusion of Additional Charges: Banks should exclude stamp duty, registration, and other documentation charges from the cost of the financed property to maintain the effectiveness of LTV norms and ensure uniformity in valuation practices.
Innovative housing loan products – upfront disbursal of housing loans
- Some banks have launched innovative housing loan schemes in collaboration with developers/builders, such as upfront disbursal of sanctioned individual housing loans to builders without tying disbursals to construction stages.
- These schemes may involve tripartite agreements between the bank, builder, and buyer, and are commonly known as 80:20 or 75:25 schemes.
- Risks Associated with Such Products: These housing loan products pose additional risks to banks and borrowers, including disputes between borrowers and developers, default or delayed payments by developers during the construction period, and non-completion of projects on time.
- Delayed payments by developers may negatively impact borrowers’ credit ratings with credit information companies.
- Upfront disbursals without construction stage linkage expose banks to higher risks of fund diversion by developers.
- Linkage of Loan Disbursals to Construction Stages: Disbursal of housing loans to individuals should be tied closely to construction stages of housing projects, and upfront disbursals should be avoided for incomplete or under-construction projects.
- Exceptions for Government/Statutory Authority Projects: In cases of projects sponsored by government or statutory authorities, banks may disburse loans based on payment stages prescribed by such authorities, even if payments from house buyers are not linked to construction stages, provided the authorities have a history of project completion.
- Customer Awareness and Suitability: Banks should consider customer suitability and appropriateness issues while introducing new products, ensuring that borrowers are fully informed about the risks and liabilities associated with such schemes.
Approvals from statutory/regulatory authorities
- Banks should ensure borrowers have obtained necessary permissions from government/local authorities for real estate projects.
- While loan proposals can be sanctioned, disbursements should only be made after borrowers obtain required clearances.
Disclosure requirements
- Banks must stipulate that builders/developers disclose mortgage information in project brochures, advertisements, and provide NOCs from mortgagee banks if needed.
- Funds should not be released until these conditions are met, applicable to Commercial Real Estate as well.
Exposure to real estate
- Banks should establish prudential norms for real estate loans, including total amount, single/group exposure limits, margins, security, repayment schedules, and supplementary finance.
- Policies should align with RBI guidelines and be approved by the bank’s board.
Housing loans under priority sector
- Housing loans for priority sector lending must comply with instructions on “Priority Sector Lending” as amended.
Financing of affordable housing-issue of long-term bonds by banks
- Banks can issue long-term bonds for affordable housing subject to conditions outlined in relevant circulars. [DBR.BP.BC.No.25/08.12.014/2014-15 dated July 15, 2014 on “Issue of Long term Bonds by Banks- Financing of Infrastructure and Affordable Housing]
Fair lending practices
- Banks should follow guidelines for responsible lending conduct, release of property documents, disclosure of penal interest, and fair practices as per RBI circulars. [Circular DoR.MCS.REC.38/01.01.001/2023-24 dated September 13, 2023 on “Responsible Lending Conduct – Release of Movable / Immovable Property Documents on Repayment/ Settlement of Personal Loans”]
- To ensure reasonableness and transparency in disclosure of penal interest, banks should follow the guidelines issued vide circular MCS.REC.28/01.01.001/2023-24 dated August 18, 2023 on “Fair Lending Practice – Penal Charges in Loan Accounts”
- (c) Banks should follow the guidelines on fair practices code for lenders as indicated in para 2.5 of Master Circular – Loans and Advances – Statutory and Other Restrictions dated July 01, 2015.
Additional guidelines
- Banks should adhere to National Building Code and National Disaster Management Authority guidelines for safety against natural disasters, considering them in loan policies, procedures, and documentation.
In conclusion, the RBI’s guidelines on housing finance represent a concerted effort to promote stability, inclusivity, and efficiency in the housing finance market. By establishing prudent norms, encouraging responsible lending practices, and prioritizing affordable housing, these guidelines aim to address the diverse needs of borrowers while safeguarding the financial health of lending institutions.
Moreover, by emphasizing compliance with regulatory requirements, disclosure transparency, and adherence to safety standards, the RBI seeks to enhance consumer confidence and trust in the housing finance sector. Moving forward, it is imperative for banks and financial institutions to align their practices with these guidelines, ensuring sustainable growth and equitable access to housing finance for all sections of society. In doing so, they will not only contribute to the realization of individual homeownership dreams but also foster broader socio-economic development and prosperity.
We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com or write to our authors:
Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com
Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
