The RBI master circular on Housing Finance was notified on February 18th 2022 (consolidating the instructions given to banks relating to housing finance issued up to February 17th 2022) exercising its powers under section 21 and 35A of the Banking Regulation Act, 1949 as having application over to all Scheduled Commercial Banks, excluding Regional Rural Banks.
The circular clarified in great detail when should such a financial institution offer its services when it comes to housing finances. The list is lucid and comprehensive. The circular explains that the banks should prepare their policies in line with the RBI guidelines and ensure that bank credit is used for production and construction activities and not for activities connected with speculation in real estate.
The circular clarifies that the bank finance can be granted only for the purchase of a plot, with a declaration from the borrower specifying that he wants to construct a house on the land.
On the question of construction of a building, the circular says that services can be offered for the purchase/construction/repair of a welling house per unit family. It also says that loans can be granted for purchase/construction of the second house, either in the same town/village or some other town/village given it is used for self-occupation.
Loans can be given to a person who proposes to rent the purchased/constructed house, on account of being posted outside of the headquarters and they can also be granted for purchasing of an old house, where the borrower resides as a tenet. Loans can also be given for the purpose of construction meant for improving the conditions of a slum dweller, either directly through them with the guarantee of the central government or indirectly with the guarantee of the state government. Loans also can be offered for slum improvement projects which are implemented by some public agency as per the Circular.
Considering the observations made by the Hon’ble Delhi High Court, the Circular also provides for guidelines to combat unauthorized construction. The circular requires the banks to obtain a copy of the sanctioned plan by a competent authority in the name of a person applying for such credit facility – where the person with a plot approaches the bank, an affidavit-cum-undertaking must be obtained from them when applying for such credit facility. This should state that they shall not violate the construction plan and that they will obtain the completion certificate within 3 months of the completion of the project, failing which the bank will have the power to recall the loan with interest and other bank charges.
The circular requires the bank to appoint an architect who will certify at various stages if the construction is going on as planned and to certify the completion certificate by a competent authority. They will also certify before the disbursement of the loan that the construction has been done in accordance with the sanctioned plan.
The circular stresses that no loan can be granted for properties that fall in the category of unauthorised colonies. The circular also clarifies that loans cannot be provided in cases when the applicants want to use a property listed for residential use or commercial purposes.
On the question of supplementary finance, the circular says that it can be granted to the body constituted for undertaking the repairs of the house, or to the owner of the building/house/flat to meet any requirements or
needed repairs/additions after estimating the cost and obtaining securities. It can be given for repair/addition to a building/house/flat that has been financed by it within the overall ceiling for carrying such activity. It can be given for a building/house/flat which has been financed by some other Financial Institutions as well, after obtaining a second mortgage on the property mortgaged in favour of some other lender and/or against such security which they deem fit.
Talking about when bank finances cannot be granted, the circular specifies that it cannot be granted for the construction of a building that is purely for government/semi-government offices, though it can be granted for activities that will be refinanced by institutions like NABARD. It should not be granted for projects undertaken by PSEs, which are not corporate bodies, and even here, the banks should satisfy themselves that the project undertaken should be on commercial lines. The loan can, however, be granted as a supplementary budget if such supplementing is compensated in the project design
On the question of lending to Housing Intermediary Agencies, the circular is very crisp and clear. For financing of land acquisition, the circular – in the interest of increasing the availability of house sites – can finance public agencies only and that too when they are a part of the complete project, including the development of basic infrastructure. The circular clarifies that the banks should have a board-approved policy in place for the valuation of properties including collaterals accepted for their exposures and that valuation should be done by professionally qualified independent valuers. On the question of lending to a Housing Finance Institution, the answer is affirmative, given that all factors are taken into consideration. Bank can also give loans to state-level housing boards and other public agencies, keeping in mind their past performance.
On the terms on which a loan can be given to a private builder, the circular says that loans can be provided to the private builder for construction on commercial terms but not for land acquisition. It is the duty of the bank to ensure that no part of the funds is used for speculation on lands.
Terms loans can be given to the Housing Intermediary Agencies, even to those that are financed by NRIs, though such intermediaries should be authorised by the RBI.
Further, the lending to the housing intermediary should be subject to the circular DBOD.BP.BC.No.42/08.12.015/2009- 10 dated September 9th 2009 on Guidelines on the classification of exposures as Commercial Real Estate (CRE).
The circular also clarifies the quantum of load concerning the Loan to Value (LTV) ratio and Risk Weights (RWs) by providing the information in a tabular format mentioned below:
The circular clarifies that the value of stamp duty, registration and other documentation charges should not be included in deciding the value of the loan, though it may be added if the cost of the house does not exceed INR 10 lakhs.
The circular pointed out the problem a bank can face when introducing some Innovative Housing Loan Product Schemes (referred to in the circular as the 75:25 scheme.) The circular emphasized that banks -- while introducing any kind of product -- should take into account customer suitability and appropriateness and also ensure that the borrowers/customers are made fully aware of the risks and liabilities under such products.
Coming to the question of rate of interest, the circular directs the banks to charge rate of interest on housing finances in accordance with the provision contained in Master Direction - Reserve Bank of India (Interest Rate on Advances) Directions, 2016. It also stressed that before the approval, it should be ensured by the banks that all necessary permissions have been granted by the Statutory/Regulatory Authority.
It was also advised to the banks by the circular that they should outline some norms relating to the ceiling on the total number of real estate loans, single/group exposure limit for such loans, margins, security, repayment schedules and availability of supplementary finance. The policy should be approved by the bank’s board. The circular permits the banks to issue bonds with a minimum maturity of 7 years to raise resources for lending to affordable housing.
And finally, the Circular advises the bank to adhere to the National Building Code, in lieu of the importance of the safety of the building against natural disasters. It mandates that banks should adopt the National Disaster Management Authority (NDMA) guidelines and suitably incorporate them as part of their loan policies, procedures and documentation process.