RBI bans upfront disbursal of individual housing loans

The Reserve Bank of India (RBI) has banned upfront disbursal of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project.

These loan products, popularly known by various names like 80:20, 75:25 schemes, are innovative products developed jointly by banks and builders / developers to meet initial funding needs of housing projects.

These schemes allow for upfront disbursal of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project, RBI said.

Under the scheme, which involves the signing of tripartite agreements between the bank, the builder and the buyer of the housing unit, the builder / developer services interest / monthly instalments (EMI) on the housing loan availed of by the individual borrower for a specified construction period.

RBI on Tuesday asked banks to link the disbursal of home loans to stages of 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," it said.

The RBI said 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, non-completion of the project on time as also diversion of funds.

Further, RBI said, any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis.