Housing finance for construction of building/ready built houses: Updated rules and regulations

RBI on April 3, 2023, issued a Master circular, consolidating the instructions/guidelines issued to banks on the housing finance issued up to March 31, 2023. According to the above instruction, individuals are eligible for housing finance for the construction of building/ready-built houses for the following purposes.

1. For purchase/construction of dwelling units per family and loans for repairs to the damaged dwelling units of families.
2. A person who already owns a house in the town/village where he resides, for buying/ constructing a second house in the same or another town/ village for the purpose of self-occupation.
3. A borrower who proposes to let it out on a rental basis on account of his posting outside the headquarters or because he has been provided accommodation by his employer.
4. A person who proposes to buy an old house where he is presently residing as a tenant.
5. Banks may finance construction meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the Government, or indirectly to them through the State Governments.
6. Banks may provide credit for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies.

In light of the observations of the Delhi High Court on unauthorized construction, Banks are advised to adhere to the following conditions.

(a) In cases where the applicant owns a plot/land and approaches the banks/FIs for a credit facility to construct a house, a copy of the sanctioned plan by a competent authority in the name of a person applying for such credit facility must be obtained by the Banks/FIs before sanctioning the home loan.

(b) An affidavit-cum-undertaking must be obtained from the person applying for a such credit facility that he shall not violate the sanctioned plan, construction shall be strictly as per the sanctioned plan and it shall be the sole responsibility of the executants to obtain a completion certificate within 3 months of completion of construction, failing which the bank shall have the power and the authority to recall the entire loan with interest, costs, and other usual bank charges.

(c) An Architect appointed by the bank must also certify at various stages of construction of a building that the construction of the building is strictly as per sanctioned plan and shall also certify at a particular point in time that the completion certificate of the building issued by the competent authority has been obtained.

(d) In cases where the applicant approaches the bank/FIs for a credit facility to purchase a built-up house/flat, it should be mandatory for him to declare by way of an affidavit-cum-undertaking that the built-up property has been constructed as per the sanctioned plan and/or building bye-laws and as far as possible has a completion certificate also.

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

(f) No loan should be given in respect of those properties which fall in the category of unauthorized colonies unless and until they have been regularized and developed and other charges paid.

(g) No loan should also be given in respect of properties meant for residential use but which the applicant intends to use for commercial purposes and declares so while applying for a loan.

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 might have raised funds for construction/ acquisition of accommodation from other sources and need supplementary finance, banks may extend such finance after obtaining paripassu or second mortgage charge over the property mortgaged in favour of other lenders and/or against such other security, as they may deem appropriate.

(c) Banks may consider for grant of finance to –

(i) The bodies constituted for undertaking repairs to houses, and

(ii) The owners of the building/house/flat, whether occupied by themselves or by tenants, to meet the need-based requirements for their repairs/additions, after satisfying themselves regarding the estimated cost (for which requisite certificate should be obtained from an Engineer / Architect, wherever necessary) and obtaining such security as deemed appropriate.

Banks should not grant finance for the following:

(a) Banks should not grant finance for the construction of buildings meant purely for Government/Semi-Government offices, including Municipal and Panchayat offices. However, banks may grant loans for activities, which will be refinanced by institutions like NABARD.

(b) Projects undertaken by public sector entities that are not corporate bodies (i.e. public sector undertakings that are not registered under the Companies Act or which are not Corporations established under the relevant statute) may not be financed by banks. Even in respect of projects undertaken by corporate bodies, as defined above, banks should satisfy themselves that the project is run on commercial lines and that bank finance is not in lieu of or to substitute budgetary resources envisaged for the project. The loan could, however, supplement budgetary resources if such supplementing was contemplated in the project design. Thus, in the case of a housing project, where the project is run on commercial lines, and the Government is interested in promoting the project either for the benefit of the weaker sections of society or otherwise, and a part of the project cost is met by the Government through subsidies made available and/or contributions to the capital of the institutions taking up the project, the bank finance should be restricted to an amount arrived at after reducing from the total project cost the amount of subsidy/capital contribution receivable from the Government and any other resources proposed to be made available by the Government.

(c) Banks had, in the past, sanctioned term loans to Corporations set up by the Government like the State Police Housing Corporation, for the construction of residential quarters for allotment to employees where the loans were envisaged to be repaid out of budgetary allocations. As these projects cannot be considered to be run on commercial lines, it would not be in order for banks to grant loans to such projects.

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