READ COLUMN 13 FOR HOME LOAN CONDITIONS AND DIRECTIONS TO ALL THE BANKS BY THE RBI------------------------------------
READ THE DELHI HIGH COURT ORDER ON ILLEGAL BUILDING AND ITS EFFECTS ON HOME LOANS AND RBI DIRECTIONS----------BEFORE BUYING ILLEGAL BUILDINGS RBI/ 2011-12/52 DBOD. No.DIR.BC. 03/08.12.001/2011-12
July 1, 2011
10 Aashada, 1933 (Saka)
All Scheduled Commercial Banks
(excluding RRBs)
Dear Sir/Madam,
MASTER CIRCULAR ON HOUSING FINANCE
As you are aware, in order to have all
current instructions on a subject at one place, the Reserve Bank of India had
issued a Master Circular DBOD.DIR(HSG.)No.7/08.12.01/2010-11 dated July 1,
2010 on the captioned subject, which is now updated up to 30th June 2011.
It may be noted that the Master Circular consolidates and updates all the
instructions contained in the circulars listed in the Appendix, in so far
they relate to providing bank finance to the housing sector. This Master
Circular also incorporates instructions contained in certain
clarifications issued by RBI to banks during the course of the year. A copy
of the revised Master Circular is enclosed.
Yours faithfully,
(P.R.Ravi Mohan)
Chief General Manager
Encls: As above
To consolidate framework of
rules/regulations and clarification on Housing Finance issued by Reserve Bank
of India from time to time.
A statutory directive issued by the
Reserve Bank in exercise of the powers conferred by Sections 21 and 35 A of
the Banking Regulation Act, 1949.
This Master Circular consolidates and
updates all the instructions contained in Circulars listed in the appendix
and clarifications issued during the year.
Applicable to all Scheduled Commercial
Banks, excluding Regional Rural Banks.
1. Introduction
2. Direct Housing Finance
3. Indirect Housing Finance
4. Housing Loans Under Priority Sector
5. RBI Refinance
6. Construction Activities Eligible For Bank
Credit
7. Construction Activities Not Eligible For
Bank Credit
8. Reporting
9. Home Loan Account Scheme (HLAS) for NHB
10.
Banks' Exposure
to Real Estate Sector
11. Risk Weight on Housing Finance
12.Delhi High
Court Order on Unauthorized Construction
13.Terms and
conditions for Banks Investments in Mortgage Backed Securities (MBS)
14.Annex :
Financial assistance granted by scheduled commercial banks under the category
'Housing Finance' as on Sept. 30 /Mar.31
15. Appendix: Housing Finance circulars
In pursuance of National Housing Policy
of Central Government, Reserve Bank of India has been facilitating the flow
of credit to housing sector. Since housing has emerged as one of the sectors
attracting a large quantum of bank finance, the current focus of RBI's
regulation is to ensure orderly growth of housing loan portfolios of banks.
1.1.1 National Housing Policy
As a part of the strategy to overcome the
colossal housing shortage, the Central Government adopted a comprehensive
National Housing Policy which, among other things, envisaged:
i.
development of a
viable and accessible institutional system for the provision of housing
finance;
ii.
establishing a
system where housing boards and development authorities would concentrate on
acquisition and development of land and infrastructure; and
iii.
creation of
conditions in which access to institutional finance is made easier and
affordable for individuals forconstruction/buying of houses/flats. This
may include outright purchase of houses/flats constructed by or under the
aegis of public agencies.
Banks with their vast branch network
throughout the length and breadth of the country occupy a very strategic
position in the financial system and were required to play an important role
in providing credit to the housing sector in consonance with the National
Housing Policy.
1.1.2 Housing Finance Allocation
Keeping in view the objectives of
National Housing Finance Policy, RBI was announcing minimum housing finance
allocation annually on the basis of the growth of deposits recorded during
the previous year till the year 2002-03. Banks could deploy their funds
under the housing finance allocation in any of the three categories, i.e.
i.
direct finance,
ii.
indirect finance,
iii.
investment in
bonds of NHB/HUDCO, or combination thereof.
2.1 Direct Housing Finance refers to the finance
provided to individuals or groups of individuals including co-operative
societies.
2.2 Banks are free to evolve their own guidelines with
the approval of their Boards on aspects such as security, margin, age of
dwelling units, repayment schedule, etc.
2.3 Other Guidelines
The following types of bank finance may
be included under Direct Housing Finance:
i.
Bank finance
extended to a person who already owns a house in town/village where he
resides, for buying/ constructing a second house in the same or other town/
village for the purpose of self occupation.
ii.
Bank finance
extended for purchase of a house by a borrower who proposes to let it out on
rental basis on account of his posting outside the headquarters or because he
has been provided accommodation by his employer.
iii.
Bank finance
extended to a person who proposes to buy an old house where he is presently
residing as a tenant.
iv.
Bank finance
granted only for purchase of a plot, provided a declaration is 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.
v.
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 pari passu or second mortgage charge over the property
mortgaged in favour of other lenders and/or against such other security, as
they may deem appropriate.
3.1 General
Banks should ensure that their indirect housing finance is channeled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc., primarily for augmenting the supply of serviced land and constructed units. It should also be ensured that the supply of plots/houses is time bound and public agencies do not utilise the bank loans merely for acquisition of land. Similarly, serviced plots should be sold by these agencies to co-operative societies, professional developers and individuals with a stipulation that the houses should be constructed thereon within a reasonable time, not exceeding three years. For this purpose, the banks may take advantage of various guidelines issued by NHB for augmenting the supply of serviced land and constructed units. 3.2 Lending to Housing Intermediary Agencies 3.2.1 Lending to Housing Finance Institutions
i.
Banks may grant
term loans to housing finance institutions taking into account (long-term)
debt-equity ratio, track record, recovery performance and other relevant
factors.
ii.
In terms of NHB
guidelines, housing finance companies’ total borrowings, whether by way of
deposits, issue of debentures/ bonds, loans and advances from banks or from
financial institutions including any loans obtained from NHB, should not
exceed 16 times of their net owned funds (i.e. paid-up capital and free
reserves less accumulated balance of loss, deferred revenue expenditure and
intangible assets).
iii.
All housing
finance companies registered with NHB are eligible to apply for refinance from
NHB and will be eligible subject to the refinance policy. The quantum
of term loan to be sanctioned to them will not be linked to net owned fund as
NHB has already prescribed the above referred ceiling on total borrowing of
housing finance companies. A list of housing finance companies
registered with NHB may be obtained by the banks directly from NHB or
downloaded from www.nhb.org.in.
3.2.2 Lending to Housing Boards and
Other Agencies
Banks may extend term loans to state
level housing boards and other public agencies. However, in order to develop
a healthy housing finance system, while doing so, the banks must not only
keep in view the past performance of these agencies in the matter of recovery
from the beneficiaries but they should also stipulate that the Boards will
ensure prompt and regular recovery of loan installments from the
beneficiaries.
3.2.3 Financing of Land Acquisition
In view of the need to increase the availability of land and house sites for increasing the housing stock in the country, banks may extend finance to public agencies and not private builders for acquisition and development of land, provided it is a part of the complete project, including development of infrastructure such as water systems, drainage, roads, provision of electricity, etc. Such credit may be extended by way of term loans. The project should be completed as early as possible and, in any case, within three years, so as to ensure quick re-cycling of bank funds for optimum results. If the project covers construction of houses, credit extended therefore in respect of individual beneficiaries should be on the same terms and conditions as stipulated for direct finance.
It has been observed that while financing
real estate developers, certain banks were found to be valuing the land for
the purpose of security, on the basis of the discounted value of the property
after it is developed, less the cost of development. This is not in
conformity with established norms. In this connection, it is advised
that banks should have a Board approved policy in place for valuation of
properties including collaterals accepted for their exposures and that
valuation should be done by professionally qualified independent
valuers. As regards the valuation of land for the purpose of financing
of land acquisition as also land secured as collateral, banks may be guided
as under:
a. Banks may extend finance to public
agencies and not to private builders for acquisition and development of land,
provided it is a part of the complete project, including development of
infrastructure such as water systems, drainage, roads, provision of
electricity, etc. In such limited cases where land acquisition can be
financed, the finance is to be limited to the acquisition price (current price)
plus development cost. The valuation of such land as prime security
should be limited to the current market price.
b. Wherever land is accepted as collateral,
valuation of such land should be at the current market price only.
3.2.4 Terms and Conditions for
Lending to Housing Intermediary Agencies
i.
In order to
enhance the flow of resources to housing sector, term loans may be granted by
banks to housing intermediary agencies against the direct loans sanctioned/
proposed to be sanctioned by the latter, irrespective of the per borrower
size of the loan extended by these agencies.
ii.
Banks can grant
term loans to housing intermediary agencies against the direct loans
sanctioned/proposed to be sanctioned by them to Non-Resident Indians also.
However, banks should ensure that housing finance intermediary agencies being
financed by them, are authorised by RBI to grant housing loans to NRIs as all
housing finance intermediaries are not authorised by RBI to provide housing
finance to NRIs.
iii.
Banks have
freedom to charge interest rates to housing intermediary agencies without
reference to Benchmark Prime Lending Rates (BPLR) upto June 30, 2010.
Under the Base Rate System effective from July 1, 2010, all categories of
loans will be priced with reference to Base Rate which is the minimum
interest rate for all loans.
3.3 Term Loans to Private Builders
3.3.1 In view of the important role played by professional
builders as providers of construction services in the housing field,
especially where land is acquired and developed by State Housing Boards and
other public agencies, commercial banks may extend credit to private builders
on commercial terms by way of loans linked to each specific project. However,
the banks are not permitted to extend fund based or non-fund based facilities
to private builders for acquisition of land even as part of a housing
project. The period of credit for loans extended by banks to private
builders may be decided by banks themselves based on their commercial
judgement subject to usual safeguards and after obtaining such security, as
banks may deem appropriate. Such credit may be extended to builders of
repute, employing professionally qualified personnel. It should be ensured,
through close monitoring, that no part of such funds is used for any
speculation in land.
Care should also be taken to see that
prices charged from the ultimate beneficiaries do not include any speculative
element, that is, prices should be based only on the documented price of
land, the actual cost of construction and a reasonable profit margin.
3.3.2 It is advised that banks should adhere to the
National Building Code (NBC) formulated by the Bureau of Indian Standards
(BIS) in view of the importance of safety of buildings especially against
natural disasters. Banks may consider this aspect for incorporation in their
loan policies. Banks should also adopt the National Disaster Management
Authority (NDMA) guidelines and suitably incorporate them as part of their
loan policies, procedures and documentation.
3.3.3 Incorporating clause in the
terms and conditions to disclose in Pamphlets / Brochures / advertisements
information regarding mortgage of property to the bank
In a case which came up before the Hon’ble
High Court of Judicature at Bombay, the Hon’ble Court observed that the bank
granting finance to housing / development projects should insist on
disclosure of the charge / or any other liability on the plot, in the
brochure, pamphlets etc., which may be published by developer / owner
inviting public at large to purchase flats and properties. The Court also
added that this obviously would be part of the terms and conditions on which
the loan may be sanctioned by the bank.Keeping in view the above, while
granting finance to specific housing / development projects, banks are
advised to stipulate as a part of the terms and conditions that:
i.
the builder /
developer / company would disclose in the Pamphlets / Brochures etc., the
name(s) of the bank(s) to which the property is mortgaged.
ii.
the builder /
developer / company would append the information relating to mortgage while
publishing advertisement of a particular scheme in newspapers / magazines
etc.
iii.
the builder /
developer / company would indicate in their pamphlets / brochures, that they
would provide No Objection Certificate (NOC) / permission of the mortgagee
bank for sale of flats / property, if required.
Banks are also advised to ensure compliance
of the above terms and conditions and funds should not be released unless the
builder/developer/company fulfils the above requirements.
Banks may refer to the Master Circular on
Lending to Priority Sector issued by Rural Planning and Credit Department.
Finance provided by the banks would not
be eligible for refinance from Reserve Bank.
The following types of bank credit will
be eligible for being treated as housing finance:
i.
Loans to
individuals for purchase/construction of dwelling unit per family and loans
given for repairs to the damaged dwelling units of families;
ii.
Finance provided
for construction of residential houses to be constructed by public housing
agencies like HUDCO, Housing Boards, local bodies, individuals, co-operative
societies, employers, priority being accorded for financing construction of
houses meant for economically weaker sections, low income group and middle
income group;
iii.
Finance for
construction of educational, health, social, cultural or other
institutions/centers, which are part of a housing project and which are
necessary for the development of settlements or townships;
iv.
Finance for
shopping complexes, markets and such other centers catering to the day to day
needs of the residents of the housing colonies and forming part of a housing
project;
v.
Finance for
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;
vi.
Bank credit given
for slum improvement schemes to be implemented by Slum Clearance Boards and
other public agencies;
vii.
Finance provided
to–
a.
the bodies
constituted for undertaking repairs to houses, and
b.
the owners of
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;
viii.
Housing finance
provided by banks for which refinance is availed of from National Housing
Bank (NHB);
ix.
Investment in the
guarantee/non-guaranteed bonds and debentures of NHB/HUDCO in the primary
market, provided investment in non-guaranteed bonds is made only if
guaranteed bonds are not available.
7.1 Banks should not grant finance for 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.
7.2 Projects undertaken by public sector entities which
are not corporate bodies (i.e. public sector undertakings which are not
registered under 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 the 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.
7.3 Banks had, in the past, sanctioned term loans to
Corporations set up by Government like State Police Housing Corporation, for
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.
Banks should compile the data relating to
Housing Finance at half-yearly intervals on the lines of format given in
Annex and keep it ready for being made available to the bank’s internal
inspectors/RBI’s inspectors.
9.1 Foreclosure of Loans Obtained from Other
Sources
9.1.1 Under the HLAS, a member of HLAS is eligible for a
loan after subscription to the scheme for a minimum period of 5 years. The
member has to declare while joining the scheme/availing loan that he/ she
does not own a house/flat. However, a member may acquire a house or a flat
from a public agency/co-operative/ private builder by obtaining a loan from a
bank at the normal rate of interest or from friends and relatives or through
a hire-purchase scheme of Housing Board/ Development Authority. Thereafter,
when the member becomes eligible for a loan under HLAS, he/she may approach
the bank for such a loan to repay the loan(s) raised earlier from other
sources.
9.1.2 There is no objection to bank loans under HLAS
being utilised for foreclosing loans secured earlier from other sources, as a
special case.
9.2 Classification of
Deposits/Loans under HLAS
Under HLAS, the participating bank is
required to accept deposits on behalf of NHB and make use of these deposits
by way of refinance under any scheme approved by NHB from time to time. The
surplus funds, if any, not so utilised (i.e. excess of deposits over
refinance) can either be remitted by the participating bank to NHB or
retained by it, subject to compliance with the statutory reserve requirements
as under:
i.
The deposits
under the HLA Scheme are on a recurring basis; and they should be treated as
‘time’ liabilities, subject to reserve requirements under Section 42(1) of
the Reserve Bank of India Act, 1934 as also under Section 24 of the Banking
Regulation Act, 1949 and included under item II (a) (ii) of Form ‘A’.
ii.
In terms of
sub-clause (ii) of clause I of the Explanation to Sub-Section (1) of Section
42 of the RBI Act, as amended by clause 3 of the Second Schedule to the
National Housing Bank Act, 1987, ‘liabilities’ will not include any loan
taken from NHB. Hence, the deposits utilised as refinance from NHB should be
deducted from the total deposits received under the HLA Scheme while
including the amount under item II (a) (ii) of Form ‘A’.
While the development of real estate is
welcome, there is a need for the banks to curb the excessively risky lending
by exercising selectivity and strengthening the loan approval process.
Banks should ensure that the borrowers should have obtained prior permission
from government/local governments/other statutory authorities for the
project, wherever required. While the proposals could be sanctioned in
normal course, the disbursements should be made only after the borrower has
obtained requisite clearances from the government authorities.
Banks may refer to Master Circular on
Prudential guidelines on Capital Adequacy and Market Discipline -
Implementation of the New Capital Adequacy Frame Work.
In order to prevent excessive leveraging,
the LTV ratio in respect of housing loans should not exceed 80 per cent. However,
for small value housing loans i.e. housing loans up to Rs. 20 lakh (which get
categorized as priority sector advances), the LTV ratio
should not exceed 90 per cent.
The
Monitoring Committee constituted by the Hon'ble High Court of Delhi regarding
Unauthorised Construction, Misuse of Properties and Encroachment on Public
Land, has issued the following directions for immediate compliance by the
banks/ Financial Institutions.
A.
Housing Loan for building construction
i.
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 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.
ii.
An affidavit-cum-undertaking must be obtained from the
person applying for 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
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.
iii.
An Architect appointed by the bank must also certify at
various stages of construction of building that the construction of the
building is strictly as per sanctioned plan and shall also certify at a
particular point of time that the completion certificate of the building issued
by the competent authority has been obtained.
B.
Housing Loan for purchase of constructed property/ built up property
i.
In cases where the applicant approaches the bank/FIs for a
credit facility to purchase the 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.
ii.
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.
C.
Unauthorised colonies
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 development and other charges paid.
D. Commercial Property
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 loan.
14.1 Banks’ investments in MBS should satisfy
the following terms and conditions:
(i) The right, title, and interest of an
HFC in securitised housing loans and receivables there under should
irrevocably be assigned in favour of a Special Purpose Vehicle (SPV) / Trust.
(ii) Mortgaged securities underlying the
securitised housing loans should be held exclusively on behalf of and for the
benefit of the investors by the SPV/Trust.
(iii) The SPV or Trust should be entitled
to the receivables under the securitised loans with an arrangement for
distribution of the same to the investors as per the terms of the issue of
MBS. Such an arrangement may provide for appointment of the originating HFC
as the servicing and paying agent. However, the originating HFC
participating in a securitisation transaction as a seller, manager, servicer
or provider of credit enhancement of liquidity facilities,
a. shall not own any share capital in the
SPV or be the beneficiary of the Trust used as a vehicle for the purchase and
securitisation of assets. Share capital for this purpose shall include all
classes of common and preferred share capital.
b. shall not name the SPV in such manner as
to imply any connection with the bank.
c. shall not have any directors, officers,
or employees on the board of the SPV unless the board is made of at least
three members and where there is a majority of independent directors. In
addition, the official (s) representing the bank will not have veto powers.
d. shall not directly or indirectly control
the SPV, or
e. shall not support any losses arising from
the securitisation transaction or by investors involved in it or bear any of
the recurring expenses of the transaction.
(i) The loans to be securitised should be
loans advanced to individuals for acquiring /constructing residential houses
which should have been mortgaged to the HFC by way of exclusive first charge.
(ii) The loans to be securitised should
be accorded an investment grade credit rating by any of the credit rating
agencies at the time of assignment to the SPV.
(iii) The investors should be entitled to
call upon the issuer-SPV to take steps for recovery in the event of default
and distribute the net proceeds to the investors as per the terms of issue of
MBS.
(iv) The SPV undertaking the issue of MBS
should not be engaged in any business other than the business of issue and
administration of MBS of individual housing loans.
(v) The SPV or Trustees appointed to
manage the issue of MBS should have to be governed by the provisions of
Indian Trust Act, 1882.
14.2 If the issue of MBS is in accordance with the terms and
conditions stated in above paragraph and includes irrevocable transfer of
risk and reward of housing loan assets to the Special Purpose Vehicle (SPV) /
Trust, investment in such MBS by any bank would not be reckoned as an
exposure on the HFC originating the securitised housing loan. However, it
would be treated as an exposure on the underlying assets of the SPV/ Trust.
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Saturday, July 2, 2011
HOME LOANS AND RBI DIRECTIONS TO BANKS ON 01-07-2011-READ COLUMN 13
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