Tuesday, August 4, 2015

Housing Finance



INTRODUCTION
Banks have the freedom to evolve their own guidelines on various aspects of granting housing finance with the approval of their Boards.

VARIOUS REGULATIONS
Banks have to consider the following RBI guidelines while formulating their policies. They should make sure that the credit is not used for speculation in real estate.

(a) ACQUISITION OF LAND
Bank may grant finance for purchase of a plot subject to the condition that the borrower intends to construct a house on the said plot, within a period laid down by the banks.

(b)  CONSTRUCTION OF BUILDING / READY-BUILT HOUSE

(i) Banks may grant loans for purchase/construction/repair of dwelling unit per family.

(ii) Bank may extend finance to a person for buying/ constructing a second house for the purpose of self occupation.

(iii)   Bank may finance the purchase of a house to be let out on rent, when the borrower is posted outstation or he has been provided accommodation by his employer.

(iv) Bank may finance the purchase of an old house where the borrower is presently residing as a tenant.

(v)    Banks may finance for construction in slum areas. Credit in such cases may be extended directly to the slum-dwellers on the guarantee of the Government, or indirectly through the State Governments.

(vi) Bank may provide credit for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies.

(vii)Banks are advised to adhere to the following conditions:

(a)        Where the applicant owns a plot and requests for finance to construct a house, a copy of the sanctioned plan by competent authority must be obtained before sanctioning the loan.

(b)        Construction shall be strictly as per the sanctioned plan. The executants will obtain completion certificate within 3 months of completion of construction, failing which the bank may recall the entire loan with interest and other charges.

(c)             An Architect appointed by the bank must certify that the construction of the building is as per plan and shall certify that the completion certificate of the building issued by the competent authority has been obtained.

(d)          In case of a built up house, it is mandatory for the borrower to declare by way of an affidavit-cum-undertaking that the built up property has been constructed as per the sanctioned plan and building bye-laws and as far as possible has a completion certificate also.

(e)          An Architect appointed by the bank must certify before disbursement that the built up property is as per sanctioned plan and building bye-laws.

(f)           No loan should be given in respect of those properties which fall in the category of unauthorized colonies

(g)          No loan should be given for purchase of residential property which the borrower declares he will use for commercial purposes.

(viii)       Supplementary Finance
(a)        Banks may consider requests for additional finance within the overall ceiling for carrying out alterations/ additions/repairs to the house/flat already financed by them.

(b)          In the case of individuals who need supplementary finance, banks may extend it after obtaining paripassu or second mortgage charge over the property mortgaged in favour of other lenders.

(c)          Banks may consider to grant finance to –

(i)             the bodies constituted for undertaking repairs of houses, and

(ii)               the owners, for repair/addition, subject to obtaining estimate of cost , and security as deemed appropriate.

(ix)               Bank finance should, however, not be granted for the following:
(a)          Banks should not grant finance for construction of buildings meant purely for Government/Semi-Government offices. However, banks may grant loans for activities, which will be refinanced by institutions like NABARD.

(b)          Projects which are not registered under Companies Act may not be financed by banks. Banks should satisfy themselves that the project is run on commercial lines and that bank finance is not in lieu of budgetary resources. The loan could, however, supplement budgetary resources if such supplementing was contemplated in the project design. In such cases, Banks will finance the difference of total project cost and the subsidy/capital contribution receivable from the Government.

(c)                As projects for construction of residential quarters for allotment to Government employees cannot be considered to be run on commercial lines, it would not be in order for banks to grant loans to such projects.


(C)             LENDING TO HOUSING INTERMEDIARY AGENCIES

(i) Financing of Land Acquisition

(a) Banks may extend finance to public agencies and not private builders for acquisition and development of land, provided it is a part of the complete project, including development of infrastructure. Such credit may be extended by way of term loans. The project should be completed within three years. If the project covers construction of houses, credit extended in respect of individual beneficiaries should be on the same terms and conditions as stipulated for financing the beneficiary directly.

(b)          Banks should have a Board approved policy in place for valuation of properties.

(c)          As regards the valuation of land, banks may be guided as under:

(i)            In cases where land acquisition can be financed, the finance is to be limited to the acquisition price (current market price) plus development cost.
(ii)                 Wherever land is accepted as collateral, valuation of such land should be at the current market price only.

(ii) Lending to Housing Finance Institutions
Banks may grant term loans to housing finance institutions taking into account (long-term) debt-equity ratio, track record, recovery performance and other relevant factors

(iii) Lending to Housing Boards and Other Agencies
Banks may extend term loans to state level housing boards and other public agencies. However, banks must keep in view their past performance in the matter of recovery from the beneficiaries and should also require them to ensure prompt and regular recovery from the beneficiaries in future too.

(iv) Term Loans to Private Builders
(a) Commercial banks may extend credit to private builders on commercial terms by way of loans linked to each specific project where land is acquired and developed by State Housing Boards and other public agencies.

(b)          Banks however, are not permitted to extend fund based or non-fund based facilities to private builders for acquisition of land even as part of a housing project.

(c)          The period of credit for such loans may be decided by banks themselves based on their commercial judgment subject to usual safeguards.

(d)               Such credit may be extended to builders of repute, employing professionally qualified
personnel. It should be ensured, that the funds are not used for speculation.

(e) Price charged from the ultimate beneficiaries should be based only on the documented price of land, the actual cost of construction and a reasonable profit margin.


(v)               Terms and Conditions for Lending to Housing Intermediary Agencies
(a) Term loans may be granted to housing intermediary agencies against the direct loans sanctioned/ proposed to be sanctioned such agencies.

(b) Term loans can be granted against the direct loans sanctioned/proposed to be sanctioned to Non-Resident Indians also. However, such agencies should be authorised by RBI to grant housing loans to NRIs.

(c) Under the Base Rate System these of loans will be priced with reference to Base Rate which is the minimum interest rate for all loans.


(vi)             Adherence to guidelines on Commercial Real Estate (CRE) exposure
Lending to housing intermediary agencies will be subject to the guidelines on commercial real estate exposure.


3. QUANTUM OF LOAN

(a) While deciding the quantum of loan to be granted as housing finance, banks should ensure that the LTV ( Loan to Value) ratio for loans are as under:

Category of Loan
LTV Ratio (%)


(a) Individual Housing Loans



Upto ` 20 lakh
90


Above  ` 20 lakh & upto ` 75 lakh
80


Above  ` 75 lakh
75


(b) CRE – RH
NA




(b)          Bbanks should not include stamp duty, registration and other documentation charges in the cost of the housing property, so that the effectiveness of LTV norms is not diluted.

(c)          Where the cost of the units does not exceed Rs.10 lakh, bank may add stamp duty, registration and documentation charges to the cost for the purpose of calculating LTV ratio.

(d)               Some banks have introduced certain schemes where upfront disbursal is made to the builders without linking the disbursals to various stages of construction . Interest/EMI on these loans are serviced by the builders on behalf of the individual borrowers during a specified period.

(e) Such products expose the banks as well as individual borrowers to additional risks. Further, any delayed payments by developers/ builders may lead to lower credit rating of such borrowers. Banks also run disproportionately higher exposures with risks of diversion of funds.

(f)           Disbursal of housing loans should be closely linked to the stages of construction and upfront disbursal should not be made in cases of incomplete / under-construction / green field housing projects.

(g)          In cases of projects sponsored by Government/Statutory Authorities, banks may disburse the loans as per the payment stages prescribed by such authorities, even where payments are not linked to the stages of constructions. However, such authorities should not have a past history of non-completion of projects.

(h)          Banks while introducing any product should take into account the customer suitability and ensure that they are made fully aware of the risks and liabilities under such products.


4.                  RATE OF INTEREST
Banks should charge interest on housing finance with the directives on “Interest Rates on Advances” issued by Reserve Bank of India.

5.                  APPROVALS FROM STATUTORY/ REGULATORY AUTHORITIES
While appraising loan proposals involving real estate, banks should ensure that prior permission has been obtained from the concerned authorities. Even though the loan may be approved, but no disbursement should be made without obtaining requisite clearances.

6.                  DISCLOSURE REQUIREMENTS
While granting finance to housing / development projects, banks are to stipulate the following terms and conditions:

(a)            the builder will disclose the name(s) of the bank(s) to which the property is mortgaged.


(b)            the builder will publish the information relating to mortgage in their advertisements.

(c)            the builder will indicate in their pamphlets, that they would provide No Objection Certificate (NOC) for sale of the property, if required.

(d)          Funds should not be released unless the builder fulfils the above requirements.

(e)          The above mentioned provisions will be applicable to Commercial Real Estate also.


7.         EXPOSURE TO REAL ESTATE
Banks are advised to frame Board approved prudential norms relating to the ceiling of real estate loans, single/group exposure limit for such loans, margins, security, repayment schedule and availability of supplementary finance, on the basis of guidelines issued by RBI.


8. HOUSING LOANS UNDER PRIORITY SECTOR
The grant of housing loan for the purpose of the priority sector lending targets will be subject to the instructions on “Priority Sector Lending” of RBI.


9. FINANCING OF AFFORDABLE HOUSING-ISSUE OF LONG TERM BONDS BY BANKS
Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lending to affordable housing subject to the conditions mentioned in circular on “Issue of Long term Bonds by Banks- Financing of Infrastructure and Affordable Housing”.

10.  ADDITIONAL GUIDELINES
It is advised that banks should adhere to the National Building Code (NBC) formulated by the Bureau of Indian Standards (BIS) in view of the importance of safety of buildings especially against natural disasters. Banks should also adopt the National Disaster Management Authority (NDMA) guidelines and suitably incorporate them as part of their loan policies, procedures and documentation.


Based on the Master Circular of 1/7/15. Please visit www.rbi.org.in if required……………        Poppy