The housing loan is the “Priority Sector Lending”. The Reserve Bank of India, through its Master Direction on the subject of housing loan have advised the bankers 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. Further, Banks should adopt the National Disaster Management Authority (NDMA) guidelines and suitably incorporate them as part of their loan policies, procedures and documentation. The Banks have made their own policies keeping in view of RBI directions and bank to bank , there are different loan policies for housing loan with in the defined parameters of RBI.
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 for construction/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.
Acquisition/Purchase of Plot/land
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.
An auditor should check whether
(a) ‘declaration’ 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 bank policy for housing loan has been obtained .
(b) The ‘interest rate’ has increased if the borrower non comply with the declaration terms and conditions such as, if construction is not undertaken within stipulated time limit;
(c) If such finance has been extended to public agencies only and not the private builders for acquisition and development of land.
Construction of building/ready-built house
The housing loans are described in the directions issued by the Reserve Bank Of India. The latest directions were issued in 2015-16/ 46DBR. No. DIR. BC.13 /08.12.001/2015-16 July 1, 2015. The loan for construction of house over the land/plot is prescribed in the guidelines as follows.
(a) A copy of ‘plan’ for construction on land owned by the borrower sanctioned by a competent authority in the name of borrower(s) is held
(b) Banks may grant loans to individuals for purchase/construction of dwelling unit per family and loans given for repairs to the damaged dwelling units of families.
(c) Bank may extend finance 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
(d) Bank may extend finance 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.
(e) Bank may extend finance to a person who proposes to buy an old house where he is presently residing as a tenant.
(f) Banks may 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.
(g) Banks are require to adhere conditions, in the light of the observations of Delhi High Court on unauthorized 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.
(iv) In cases where the applicant approaches the bank/FIs fora 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.
(v) 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.
(vi) 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.
(vii) 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.
(viii) In cases of projects sponsored by Government/Statutory Authorities, the disbursement of the loans have been relaxed from the linked payment stages prescribed by such authorities, provided such authorities have no past history of non-completion of projects.
An auditor should check whether
(a) NOC from builder/developer/society is held;
(b) bank’s charge has been registered with CERSAI;
(c) mortgage has been created by completing documents as per bank’s policy and title-deed is held on records;
(d) vetting of documents has been done as per bank’s policy; and
(e) other documents are held on records as per bank’s policy/documentation guidelines.
(f) In the case of ready built house , an ‘affidavit cum undertaking’ from the borrower that the built up property has been constructed as per the sanctioned plan and/or building bye-laws and as far as possible a completion certificate has been obtained;( Para 2(b)(7) (f) and (g) of RBI Master Circular.)
(g) In the case of ready built house, bank’s architect has certified before disbursement of the loan that the built up property is strictly as per sanctioned plan and/or building bye-laws ;( Para 2(b)(7) (f) and (g) of RBI Master Circular.)
(h) In the case of ready built house, certificate of residual age of property from approval valuer and title search reports are held on records.( Para 2(b)(7) (f) and (g) of RBI Master Circular.)
(i) In the case of Purchasing/constructing a Second House, whether second house has been financed for self-occupation purpose only.( Para 2(b)(ii) of the Master Circular).
(a) In the case of, Purchase of a house to let it out on rental basis, whether such house has been financed to employed borrowers only.( Para 2(b)(iii) of the Master Circula).
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.
c) Banks may consider for grant of finance to –
I. the bodies constituted for undertaking repairs to houses, and
II. 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.
Approvals from statutory/ regulatory authorities
While appraising loan proposals involving real estate, banks should ensure that the borrowers should have obtained prior permission from government / local governments / other statutory authorities for the project, wherever required. In order that the loan approval process is not hampered on account of this, 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.
Inclusion of stamp duty and other charges in LTV ratio
RBI circular DBOD.No.BP.BC.78/08.12.001/2011-12 dated February 3, 2012 on ‘Housing Loans by Commercial Banks – Loan to Value (LTV) Ratio’ advised the bankers that they should not include stamp duty, registration and other documentation charges in the cost of housing property so that the effectiveness of LTV ratio is not diluted. However, to encourage availability of affordable housing to economically weaker sections (EWS) borrowers, it has been decided that in cases where the cost of the house/dwelling unit does not exceed Rs.10 lakh, banks may add stamp duty, registration and other documentation charges to the cost of the house/dwelling unit for the purpose of calculating LTV ratio.
Quantum of loan
While deciding the quantum of loan to be granted as housing finance, banks should ensure that the LTV ratio for loans is as under:
|Category- Individual Housing Loans||LTV Ratio(%)|
|20 lakh & upto 75 lakh||80|
|Above 75 lakh||75|
Non-Performing Asset (NPA)
A master circular by the Reserve Bank of India on July 1, 2015, defined NPAs are such assets that cease to generate income for banks. Such assets are loans or advances on which banks generate income when home loan borrowers pay the interest and/or the principal amount component. A loan becomes NPA when a borrower fails to pay the interest, and/or pay back the principal amount component for a period of more than 90 days.
Banks categorise such an account as a Special Mentioned Account (SMA) when the EMI remains unpaid for a period of 30 to 90 days after the due date of payment. This is why SMAs are classified into three categories:
|SMA Category||Basis of Classification|
|SMA Bucket 1||Principle and Interest payment not overdue for over 30 days, but account reflects incipient stress|
|SMA Bucket 2||Principle and Interest payment overdue between 31-60 days|
|SMA Bucket 3||Principle and Interest payment overdue between 61-90 days|
|After SMA Bucket 3||The asset becomes an NPA.|
COVID-19 – 2020 Regulatory Package
The Reserve Bank Of India has come up with a notification RBI/2019-20/244 DOR.No.BP. BC. 71/ 21.04.048/ 2019-20 Dated May 23, 2020 referring the circulars DOR.No. BP.BC.47/ 21.04.048 /2019-20 dated March 27, 2020 and DOR. No. BP. BC.63/ 21.04.048/ 2019-20 dated April 17, 2020 announcing certain regulatory measures in the wake of the disruptions on account of COVID-19 pandemic and the consequent asset classification and provisioning norms and Rescheduling of Payments for term loans and Working Capital. RBI directed the bankers to extend the moratorium up to August 31, 2020 on payment of all instalments in respect of term loans. Accordingly, the repayment schedule for such loans as also the residual tenor will be shifted across the board. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period. and in respect of accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted in respect of term loans, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the IRAC norms. The asset classification for such accounts shall be determined on the basis of revised due dates and the revised repayment schedule.
RBI – Expiry of COVID-19 Regulatory Package
The Reserve Bank Of India, has come up with a notification RBI/2021-22/17DOR. STR. REC. 4/21.04.048/2021-22 dated April 7, 2021 as follows.
The Hon’ble Supreme Court of India has pronounced its judgement in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors. and other connected matters on March 23, 2021. In this connection, it is advised to Refund/adjustment of ‘interest on interest all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed, in terms of the circulars DOR. No. BP.BC.47 /21.04.048/ 2019-20 dated March 27, 2020 and DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020 (“Covid-19 Regulatory Package and the Lending institutions shall disclose the aggregate amount to be refunded /adjusted in respect of their borrowers based on the above reliefs in their financial statements for the year ending March 31, 2021
Asset classification of borrower accounts by all lending institutions following the above judgment shall continue to be governed by the extant instructions as clarified below.
i. In respect of accounts which were not granted any moratorium in terms of the Covid19 Regulatory Package, asset classification shall be as per the criteria laid out in the Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015 or other relevant instructions as applicable to the specific category of lending institutions (IRAC Norms).
ii. In respect of accounts which were granted moratorium in terms of the Covid19 Regulatory Package, the asset classification for the period from March 1, 2020 to August 31, 2020 shall be governed in terms of the circular .No.BP.BC. 63/21.04.048 /2019-20 dated April 17, 2020, read with circular DOR.No.BP.BC. 71/21.04.048/ 2019-20 dated May 23, 2020. For the period commencing September 1, 2020, asset classification for all such accounts shall be as per the applicable IRAC Norms.