RBI norms on Housing Finances to individuals for different purposes

Updated as per RBI master circular dated April 2, 2024

Regulated entities like Banks and Financial institutions have to take into account RBI guidelines while sanctioning loans to individuals for different purposes.

1. Bank finance for acquisition of land:

A loan may be granted by the Bank for the purchase of a plot, subject to a declaration obtained from the borrower that he intends to construct a house on the said plot, with the help of bank finance or otherwise, within such period as may be laid down by the banks themselves.

• Bank finance of building/ready-built house

Banks are permitted to grant housing loans for the following purposes.

• Loans for purchase/construction/repairs to the damaged dwelling:

Banks may grant loans to individuals for the purchase/construction of dwelling units per family and loans for repairs to the damaged dwelling units of families.

• Loan to a person who already owns a house:

Banks may extend finance to 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 self-occupation.

• Loans for buying a house for let out on rent

Banks may extend finance for the purchase of a house by 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.

• Loans to a tenant for buying an old house where he is residing

Banks may extend finance to a person who proposes to buy an old house where he is presently residing as a tenant.

• Loans to slum dwellers based on government guarantee

Banks may finance construction meant to improve 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.

• Credits for improvements under slum clearance boards and other agencies

Banks may provide credit for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies.

• Supplementary loans

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.

• Floating Rate of interest

According to floating rate of interest guidelines, Regulated Entities (REs) are permitted to offer various types of loans with either fixed or variable interest rates. However, when granting EMI-based floating rate personal loans, REs must evaluate the borrowers’ repayment capacity, guaranteeing that there is adequate flexibility to extend the loan term or increase the EMI amount if the external benchmark rate increases during the loan’s duration. There have been multiple instances where consumers have expressed dissatisfaction with the extension of loan tenure and/or increase in equated monthly installments (EMI) without appropriate communication and/or consent from the borrowers. These complaints have been raised as a result of the rise in interest rates. To effectively address these concerns, RBI has provided instructions for the reset of the floating interest rate on equated monthly installments (EMI) vide circular bearing reference number DOR.MCS.REC.32/01.01.003/2023-24 dated August 18, 2023.

• Disbursal of loans:
• Disbursal of housing loans sanctioned to individuals should 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, 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 construction, provided such authorities have no history of non-completion of projects.

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