RBI cautions co-op banks against lump sum disbursal of loans to builders

Advises construction stage-wise loan disbursal.

Written by Tanvir A Siddiqui | Ahmedabad | Published: October 11, 2013 6:07 am

Builders and real estate developers may no longer get large sums of money as loans at one go from the government.

The Reserve Bank of India (RBI) has advised the state and Central urban cooperative banks to link the sanctioned individual housing loans to construction stages,interest/EMI etc before disbursing such loans to them. Known as “innovative housing loan schemes”, banks generally disburse sanctioned individual housing loans to builders as a lump sum instead of linking it to the stages of construction.

Unlinked loans are used to bring in monetary benefits to builders in the form of cheaper credit cost and come in a lump sum from banks instead of in a staggered,stage-wise disbursal mode which should ideally be the case. Market opinion is that this advisory might lead to liquidity crunch in the construction industry,causing distress sale of housing products. Under such innovative schemes,popularly called as 80:20,75:25 scheme,loans availed by individual borrowers are serviced by builders during the construction period. In this,borrower pays 20 per cent of house cost towards down-payment and the rest comes as loan,applied for by the borrower but collected by the builder,in a lump sum.

Vijay Shah,who heads the Urban and Infrastructure Committee of the Gujarat Chamber of Commerce and Industry,has welcomed the move saying that this will stabilise the market. So far,the builder or developer could take a down-payment and then arrange for a loan to raise the remaining cost of the house on behalf of the individual borrower.

“This the builder does because then he can get the loan (in buyer’s name) at 10 per cent interest. But,if he goes straight for a housing project loan,it will attract a higher interest rate of 18 per cent,” Shah said. “This can bring a liquidity crunch in the real estate market and may lead to distress sale due to higher credit costs,” Shah said,adding that this is in the overall interest of buyers.

Such housing loans may expose banks as well as home loan borrowers to additional risks. These include dispute over default or delay in payment of interest/EMI by builder on behalf of the borrower. The disputes may also be about non-completion of the project on time,etc. Besides,banks are also exposed to risk getting lower credit rating by credit information companies due to delayed payments by developers or builders on behalf of individual borrowers.

In cases in which the bank chooses upfront disbursal of loans to builders/developers on behalf of individual borrowers in a lump sum,without any linkage to stages of construction,they run a disproportionately high risk like diversion of funds.

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