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The Reserve Bank of India (RBI) on Tuesday instructed banks not to make upfront disbursals in case of incomplete, under-construction or greenfield housing projects.
The central bank asked lenders to link the disbursals of loans to stages of completion of the project, rather than giving the entire amount upfront.
"I think this is a great move by the RBI. Our lending is always linked to the stages of construction and I feel that such a move will protect the customer and the system from any issues which may arise later," says Keki Mistry, vice-chairman and CEO, HDFC.
The central bank also advised banks not to encourage tripatriate agreements between the bank, the builder and the buyer of the housing unit, where the loan products are popularly known by various names like 80:20 and 75:25 schemes.
According to the banking regulator, such schemes expose the banks and the borrowers to a host of risks, including disputes between individual borrowers and developers or builders, default payment of interest or monthly installments by the developer or builder during the agreed period on behalf of the borrower or due to non-completion of the project on time.
"These schemes came up over the last two-three years and there are very few banks involved in such schemes. Most public sector banks, barring a few, give construction-linked loans only," said Ram Sangapure, general manager, Central Bank of India.
RBI also stressed that any delays in payments by the builders or developers will also affect the credit score of the loan borrowers, since information about servicing of loans gets passed on to the credit information companies on a regular basis.
"It is emphasised 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," RBI said in a notification on its website.
Housing loans have been one of the fastest growing categories for banks, which are trying to expand their retail portfolios on lack of corporate loan demand. According to monthly data released by RBI, the banking system's outstanding exposure to