Innovative housing loan products and upfront disbursal of loan

Updated as per RBI master circular dated April 2, 2024

According to the RBI master circular, the Central Bank has been observing that some banks have introduced certain innovative Housing Loan Schemes in association with developers/builders, such as upfront disbursal of sanctioned individual housing loans to the builders without linking the disbursals to various stages of construction of housing project, Interest/EMI on the housing loan availed of by the individual borrower being serviced by the builders during the construction period/ specified period, etc.

This type of housing loan scheme might include the signing of a tripartite agreement between the bank, the builder, and the buyer of the housing unit. These loan products are popularly known by various names like 80:20, and 75:25 schemes.

However, the banking regulator expressed its serious concern about such housing loan products that are likely to expose the banks as well as their home loan borrowers to additional risks. For instance, if there is a dispute between individual borrowers and developers/builders, default/ delayed payment of interest/ EMI by the developer/ builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc. the risk of account turning into NPA. Moreover, 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 the servicing of loans gets passed on to the CICs regularly.

Above all, in cases, where bank loans are disbursed upfront on behalf of their individual borrowers in a lump-sum to builders/ developers without any linkage to stages of construction, banks run disproportionately higher exposures with associated risks of diversion of funds.

Therefore, it is made obligatory for lenders to  disburse housing loans sanctioned shall be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of incomplete / under-construction / green field housing projects. However, the Reserve Bank has exempted banks from the above rule 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 sought from house buyers are not linked to the stages of constructions, provided such authorities have no history of non-completion of projects.

“It is emphasized that banks while introducing any kind of product should take into account the customer suitability and appropriateness issues and also ensure that the borrowers/ customers are made fully aware of the risks and liabilities under such products”, said RBI.

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