Enabling Urban Cooperative Banks in Housing Finance: A Comprehensive Review

Introduction:

Urban Cooperative Banks (UCBs) hold a pivotal position in the financial system, leveraging their extensive network to provide housing finance, particularly to vulnerable segments. Recognizing the significance of UCBs in addressing housing needs, lending to specified categories within prescribed limits is classified as priority sector lending. This underscores the social imperative driving UCBs to contribute to housing finance. To facilitate their proactive role, UCBs are empowered to extend loans for housing schemes within defined limits, utilizing their own resources in adherence to regulatory guidelines. Larger banks with surplus funds are encouraged to engage in substantial lending for housing, offering a lucrative avenue for investment. Additionally, to streamline the process, banks requiring special permission from the Registrar for financing housing societies are advised to seek general permission, subject to prescribed terms and conditions.

Eligible Category of Borrowers:

Urban Cooperative Banks (UCBs) extend loans to diverse borrower categories, including individuals, cooperative or group housing societies, and housing boards engaged in projects for economically weaker sections (EWS), low-income groups (LIG), and middle-income groups (MIG). Additionally, UCBs facilitate financing for homeowners seeking to extend or upgrade their properties, encompassing major repair works.

Eligibility for Housing Finance:

Borrowers falling into the mentioned categories are eligible for housing finance to fulfill various objectives, including the construction or purchase of houses/flats, as well as repairs, alterations, and additions to existing properties. Furthermore, finance is extended for schemes targeting housing and hostels for scheduled castes and scheduled tribes, under slum clearance initiatives either directly to slum dwellers with government guarantee or indirectly through established statutory boards. Additionally, financing is available for education, health, social, cultural, or other institutions/centers integral to housing projects’ development and for amenities like shopping centers, markets, and other facilities essential for residents’ daily needs within housing colonies.

Terms and Conditions for Housing Loans

The terms and conditions governing housing loans provided by UCBs encompass several key aspects:

1. Maximum Loan Amount & Margins: UCBs have the autonomy, with the approval of their Boards, to determine eligible borrowers, decide margins, and grant housing loans based on borrowers’ repayment capacity. Tier-1 UCBs can extend individual housing loans up to ₹60 lakh per borrower, while Tier-2 to 4 UCBs can extend loans up to ₹140 lakh, subject to prudential exposure limits.
2. Interest Rate, Foreclosure Charges, and Reset of Floating Interest Rate: Banks have the authority, with Board approval, to determine interest rates based on various factors. Foreclosure charges/prepayment penalties are not permitted on floating interest rate home loans. UCBs must consider borrowers’ repayment capacity at the time of sanctioning EMI-based floating rate housing loans and establish a policy framework for interest rate resets.
3. Penal Charges: Charges for non-compliance with loan contract terms shall be treated as penal charges and not levied as penal interest. UCBs must implement revised penal charges guidelines for all fresh loans from April 1, 2024, and for existing loans upon review/renewal by June 30, 2024.
4. Security: Housing loans may be secured by mortgage of property, government guarantee, or a combination of both. Alternatively, banks may accept security in various forms such as LIC policies, Government Promissory Notes, shares/debentures, or gold ornaments.
5. Period of Loan: Housing loans may be repayable within a maximum period of 20 years, including moratorium or repayment holiday. The moratorium may be granted based on the beneficiary’s option, completion of construction, or 18 months from the date of disbursement of the first instalment.
6. Graduated Instalments: Instalments should be fixed realistically, considering the borrower’s repaying capacity. Graduated instalments, wherein repayment amounts increase gradually with expected income growth, may be considered to make housing finance more affordable.
7. Aggregate Limit for Housing Finance: UCBs’ exposure to housing, real estate, and commercial real estate loans is capped at 10% of their total assets, with an additional 5% for housing loans to individuals. Loans must adhere to specified classifications for real estate and commercial real estate, with exceptions for certain residential housing projects.

Overall, these terms and conditions ensure responsible lending practices and prudent risk management in UCBs’ housing finance operations.

Additional / Supplementary Finance

UCBs offer additional or supplementary finance for various purposes related to housing:

1. Alterations, Additions, and Repairs: UCBs may provide finance for alterations, additions, or repairs to houses or flats already financed by them, ensuring borrowers’ repayment capacity.
2. Supplementary Finance: Individuals seeking additional funds for construction or acquisition from other sources may receive supplementary finance from UCBs. This may involve obtaining pari passu or second mortgage charge over the property and/or other suitable security, assessed based on borrowers’ aggregate repayment capacity.
3. Need-based Credit for Repairs/Additions/Alterations: UCBs can extend need-based credit for repairs, additions, or alterations, with maximum amounts set at ₹10 lakh in metropolitan centers and ₹6 lakh in other centers. Banks assess the estimated cost of such work, considering factors like materials, labour costs, and obtain necessary certifications from qualified engineers/architects.
4. Terms and Conditions: The terms and conditions for additional or supplementary finance align with those for loans for construction/acquisition. This ensures consistency in aspects such as margin, interest rates, and repayment period.

These provisions aim to cater to diverse housing finance needs while maintaining prudent lending standards.

Lending to Housing Boards:

UCBs have the authority to lend to housing boards within their respective states. The interest rates on such loans can be determined at the discretion of the banks. When extending these loans, UCBs consider not only the historical performance of the housing boards in terms of loan recovery but also stipulate that the boards must ensure timely and consistent repayment of loan installments by the beneficiaries. This approach ensures prudent lending practices while supporting housing development initiatives at the state level.

Advances to Builders / Contractors:

UCBs typically avoid extending loans to builders or contractors due to the potential for dual financing, as these entities often receive advance payments from buyers or project sponsors. However, UCBs may consider providing financial assistance to contractors engaged in smaller construction projects, where no advance payments are involved, against hypothecation of construction materials, subject to compliance with bank bylaws and RBI directives.

When evaluating loan applications, UCBs must ensure the authenticity of the purpose, borrower creditworthiness, repayment capacity, and adhere to standard safeguards such as obtaining periodic stock statements, conducting inspections, and maintaining adequate margins.

Valuation of land for security purposes should be based on current market prices, and UCBs should refrain from financing land acquisition for builders or contractors. Collateral security may be taken where available, and payments to contractors should be used to reduce outstanding loan balances.

UCBs are cautioned against lump-sum disbursals of housing loans to builders without linking disbursements to project construction stages, as this poses higher risks and may not align with customer needs. Instead, loans should be disbursed in stages based on project progress to mitigate risk exposure.

Precautions:

Banks need to be vigilant against fraudulent practices, such as obtaining multiple loans against the same property or fabricating documents. Such incidents underscore the importance of thorough verification procedures and independent assessment of document authenticity by bank officials. Banks must adhere strictly to laid-down procedures and take precautions while accepting various documents from borrowers.

Additionally, banks must ensure that loans are not utilized for unauthorized construction or property misuse. Compliance with the prescribed procedures, as outlined in Annex 2, is essential to prevent such misuse.

Following a case before the Bombay High Court, banks are advised to require disclosure of any charge or liability on the property in developer brochures and advertisements. This requirement should be included as part of loan terms and conditions. Developers should disclose mortgage details in promotional materials, and banks should ensure compliance with these requirements before releasing funds to developers.

National Building Code:

The National Building Code (NBC), formulated by the Bureau of Indian Standards (BIS), serves as a comprehensive guideline for regulating building construction activities nationwide. Updated periodically, the NBC encompasses essential elements crucial for safe and organized building development. These include administrative regulations, development control rules, fire safety requirements, specifications for materials, structural design, construction safety, and building and plumbing services. Given the significance of building safety, particularly in the face of natural disasters, adherence to the NBC is advisable. Banks’ boards may consider integrating NBC compliance into their loan policies. More information on the NBC is available on the Bureau of Indian Standards website.

Conclusion:

Urban Cooperative Banks (UCBs) serve as vital pillars in providing housing finance, particularly to economically weaker sections, thereby contributing significantly to inclusive development. This update examined the regulatory framework outlined in the Master Circular – Housing Finance for UCBs, covering various aspects such as eligibility criteria, terms and conditions for housing loans, additional finance options, lending practices, precautions against fraud, and adherence to the National Building Code. As UCBs continue to play a crucial role in addressing housing needs, adherence to these regulations will be pivotal in promoting sustainable and inclusive housing finance practices across India’s cooperative banking sector.