The pandemic crippled economies worldwide and brought the world to a standstill. The real estate industry in India was one of the worst-affected industries. The new regulations in RBI home loans are anticipated to stimulate the housing market and encourage an increase in home purchases.
The following RBI guidelines must be considered by banks when creating their policy standards to ensure that bank financing is only utilized for productive and construction purposes and not for real estate speculation-related activities.
For land acquisition under RBI’s Home Loan Guidelines
If the borrower certifies in writing that he plans to utilize the money supplied by the bank to buy the land in issue and construct a home within a given timeframe, the bank may grant a loan for its purchase. However, before making any loan, banks should receive a copy of the approved construction plan, officially issued by a competent authority. To ensure that the borrower strictly adheres to the approved plan, they need to get a “affidavit-cum-undertaking.” A bank-appointed architect must certify, following RBI standards for housing loan disbursement, that the proposed development strictly adheres to the approved plan.
To construct or purchase a home under the RBI Home Loan Guideline
- Individuals can purchase or construct residential units using “per family” bank loans.
- Suppose a person has a residential property in their name and plans to occupy it themselves. In that case, banks may provide financial assistance to purchase or construct a second home in the same city or hamlet.
- An individual can apply for a bank loan to buy a property they want to rent if given office space or an out-of-station posting.
- Banks may provide loans to people who want to buy an old house that they now rent out.
- Banks may lend money to slum inhabitants directly (with the government as a guarantee) or indirectly for building improvements to their living conditions.
- For “alterations/ additions/ repairs” to a property the bank has already financed, banks may offer additional funding “within the total limit.”
- However, bank financing should not cover the following situations:
- Banks shouldn’t fund building construction only for residential use.
- Banks may not provide financing for projects carried out by public sector entities that are not corporations.
- In the past, banks had authorized term loans for corporations established by the government, such as the State Police Housing Corporation, to build residential quarters for employee allocation. The loans were intended to be returned using budgeted funds.
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Lending to intermediary housing organizations
- Land acquisition financing
a. Banks may provide financing to public agencies rather than private builders for the acquisition and development of land as long as it is a component of the overall project, which must also include the development of infrastructure like water systems, drainage, roads, etc. Term loans may be used to prolong this credit. If the project involves building homes, the terms and conditions for credit issued for specific beneficiaries would be the same as those set forth for directly financing the beneficiary.
b. A board-approved policy for property valuation should be in place at banks, including accepted collateral for their risks and the need for valuation by independent valuers with professional credentials.
2. Lending to institutions that finance housing
Banks may offer term loans to housing finance firms by considering the (long-term) debt-to-equity ratio, track record, success, and other pertinent variables.
3. Lending to housing authorities and other organizations
Banks may offer term loans to state-level housing boards and other governmental organizations. However, to create a sound housing finance system, the banks must also specify that the Boards will focus on ensuring regular retrieval of loan installments from the beneficiaries in addition to taking into account the previous performance of these agencies in terms of recovery from the beneficiaries.
Under guidelines for RBI home loans in 2022, the link between risk weights and LTV rate
According to the new RBI guidelines for home loans, banks must apply the following Loan to Value (LTV) ratios and Risk Weights (RWs) when establishing the “quantum of loan”.
|Category of Loan||LTV Ratio (%)||Risk Weight (%)|
|(a) Individual Housing Loans|
|Upto ₹ 30 lakh||> 80 and < 90||50|
|Above ₹ 30 lakh & up to ₹ 75 lakh||< 80||35|
|Above ₹ 75 lakh||< 75||50|
|(b) CRE||RH NA||75|
Regardless of the loan size, the RBI has chosen to rationalize the RWs. It was made clear in the circular DOR.No.BP.BC.24/08.12.015/2020-21 dated October 16, 2020.
|LTV Ratio (%)||Risk Weight (%)|
|> 80 and ≤ 90||50|
Rate of interest
Banks must follow the following guidelines when charging interest on home loans they provide: the clauses of the Reserve Bank of India (Interest Rate on Advances) Directions, 2016, as revised from time to time, which make up the Master Direction.
Certifications from jurisdictional/regulatory authorities
Borrowers should have gotten approval from the relevant federal, state, local, or other statutory authorities for the project where necessary. While the plans could be approved in the regular course, the disbursements should only be made once the borrower has secured the necessary clearances from the government authorities to prevent the loan approval process from being impeded.
Conditions for disclosure
- The name of the bank to whom the property is mortgaged would be disclosed in the pamphlets, brochures, etc., by the builder, developer, or corporation.
- When printing an advertisement for a specific scheme in newspapers, magazines, etc., the builder, developer, or firm would include information about mortgages.
- The builder, developer, or business would state in their pamphlets or brochures that they would, upon request, give a No Objection Certificate (NOC) or the mortgagee bank’s consent for the sale of apartments or another real estate.
Contact with real estate
Banks would be wise to create specific prudential standards for the ceiling. The bank board shall approve the policy for the total real estate loans, the single/group limit values for such loans, margins, security, payback schedule, and accessibility of supplemental financing. The Reserve Bank’s rules should be considered when drafting the bank’s policy.
Loans for housing under the priority sector
The instructions on “Priority Sector Lending,” updated from time to time, will apply to the grant of housing loans for the prioritized sector lending targets, including reporting obligations.
Affordable housing financed: long-term bond issuance banks
Under the circumstances outlined in the circular “Issue of Long Term Bonds by Banks- Financing of Infrastructure and Affordable Housing” and similar circulars on the topic1, banks can make minimum maturity of seven years for long-term bonds to raise funds for lending to affordable housing.
Maximum borrowers repay house loans within 20 years at the most. Additionally, the updated guidelines of RBI home loans have reduced the cost of real estate for an increasing number of salaried people.