RBI bursts realty bubble, curbs builders' 80:20 scheme

If you thought outgoing Reserve Bank of India Governor D Subbarao’s comments to Finance Minister P Chidambaram was the hardest parting shot from him, this will prove it wrong.

The RBI yesterday came out with a notification curbing the 80:20 payment schemes floated by financially starved builders, the sharpest nail yet to prick the inflated real estate sector in the country.

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The directive will put further pressure on the real estate prices, which are already on a downward spiral. The move, in effect, should be good for consumers and bad for the builders.

In the notification, the RBI has asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of “innovative” housing financing schemes, popularly known as 80:20 and 75:25 schemes.

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“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…,” an RBI notification said.

Upfront disbursal “should not be made in cases of incomplete/under-construction/green field housing projects,” it said.

The notification follows the introduction by some banks of “innovative housing loan schemes” in association with developers/builders, where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction.

Also, under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period.

The RBI said such home loan products are likely to expose banks and their borrowers to additional risks.

The risks include disputes between borrowers and builders; default and delayed payment of interest/EMI by the builder on behalf of the borrower, and non-completion of the project on time.

“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…,” according to the RBI notification.

The central bank said that in cases where bank loans are disbursed upfront on behalf of individual borrowers in a lump-sum to developers without any linkage to construction stages, banks run disproportionately higher exposures with concomitant risks of fund diversion.

Banks introducing any kind of product should take into account customer suitability and appropriateness and ensure that borrowers and customers are made fully aware of the risks and liabilities, the RBI said.

With effect from June 21, the RBI revised the loan-to-value (LTV) ratio, which determines how much the banks can finance. For loans of up to Rs 20 lakh, banks can lend up to 90 per cent, while the borrower has to pay 10 per cent.

For home loans between Rs 20 lakh and Rs 75 lakh, the LTV ratio is 80:20 while for loans above Rs 75 lakh, it is 75:25. The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction.

With inputs from PTI