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‘Innovative’ home loan schemes risky, warns RBI

Upfront disbursals of lump sum loans should not be made in case of incomplete or under-construction housing projects, the central bank added

RBI on Tuesday cautioned banks and prospective home-loan customers about the pitfalls of ‘innovative loan schemes’ entailing upfront d
isbursal of individual housing loans to builders in cases of incomplete, under-construction and green-field housing projects.
The banking regulator warned such housing loan are likely to expose the banks as well as the home loan borrowers to additional risks.
The RBI cited risks, such as disputes between individual borrowers and developers/builders, default/delayed payment of interest/equated monthly instalment by the developer/builder during the agreed period on behalf of the borrower and non-completion of the project on time.


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 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, 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 RBI said.

The regulator emphasised that while introducing any kind of products, banks 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.
The RBI, in a notification, referred to innovative housing loan schemes introduced by some banks in association with developers/builders entailing 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 taken by the individual borrower, and so on.
Such schemes also include signing of tripartite agreements between the bank, the builder and the buyer of the housing unit. These loan products are popularly known by various names such as 80:20 and 75:25 schemes.

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