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RBI asks bankers to keep away from innovative housing financing schemes

The Reserve Bank of India has asked banks to refrain from activities of directly indulging in upfront housing finance with some developers, by offering subvention schemes, popularly floated as 20:80 schemes or 25:75 schemes by developers for some of their residential projects. Such schemes are usually floated by upfront disbursal of entire loans to the borrowers, where the builders try to invite more bookings by offering such lucrative schemes, by just paying the 20% on booking, while leaving rest till the date of possession/ or for after two to three years.

Such financing schemes are usually seen to be as ‘buyer friendly’ seeking only 20 per cent down payment at the time of booking, while the remainder 80 percent is paid at the time of taking possession of the property. In practice, it is a tripartite arrangement between builder, the bank and the individual borrower wherein the bank disburses the entire loan to the builder, and the builder services the interest payment for the home buyer till the apartment is ready for possession. The scheme, on the face of it, provides upfront capital to the builder to complete his project, but at the same time, it makes it easy for home buyers to organise their finances and postpone loan repayments till after they occupy their new homes.

However, such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks e.g. in case of disputes 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. Further, 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 servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also 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 concomitant risks of diversion of funds.

In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, RBI has clarified in its notification that banks are advised that 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. The latest notification has also stated 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 should be made fully aware of the risks and liabilities under such products.

However, in view of the fact that the RBI has highlighted towards 20:80 and 25:75 schemes only, and not asked banks to totally debar any such disbursals, some builders and banks have continued to find their ways to ignore the notifications. Such builders have now started offering comparatively less lucrative 40% booking schemes, with rest on possession, in agreement with some bankers.

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