Stung by the real estate bribes-for-loans scam, banks and housing finance companies will henceforth seek additional security and add completion guarantee clauses into agreements before sanctioning loans to developers. Several bankers and housing finance executives said the guidelines would become more stringent across-the-board, particularly for project financing.
For instance, banks may take legal mortgage or equitable mortgage instead of land deeds or title. Such mortgages would allow a bank to repossess and sell land and any building being constructed on it should problems arise.
Deepak Parekh, chairman, Housing Development Finance Corporation , confirmed that banks may ask for additional security when giving developers loans. “Bankers would now exercise greater caution before sanctioning loans for project finance. Things may not be difficult for home loan borrowers, though,” Parekh added.
Home loan funding for projects that are under the scrutiny of the Central Bureau of Investigation are also likely to be looked into more closely, said bank officials. On Wednesday, CBI arrested officials of LIC Housing Finance , Punjab National Bank , Central Bank of India and Bank of India for accepting bribes to provide builders with loans.
Some banks, however, said the sanctioning of home loans would become stricter.
“For the next three to six months, things will be really tight. Banks will increase the paperwork and scrutiny before sanctioning home loans. In addition, home loans for properties under construction will be under stress,” said the retail head of a leading public sector bank.
Bankers said so-called ’10-90′ projects — 10 per cent paid upfront and the balance on taking possession — launched by many builders in association with banks and housing finance companies are already facing problems after the Reserve Bank of India capped the loan-to-value (LTV) ratio at 80 last month for all home loans.
“We could look at reducing the LTV to lower than 80 per cent for riskier projects,” said another banker. RBI also increased the risk weight for loans above Rs 75 lakh (Rs 7.5 million) from 100 per cent to 125 per cent.
Bankers said lending for properties under construction, for both builders and home buyers, could be hit quite badly. At present, banks or housing finance companies provide builders with project finance only after power of attorney from the owner has been obtained, and the land declared non-agricultural.
“Even if the builder did not have all the building permits, banks and HFCs provide them loans. This practice is unlikely to continue,” said an industry observer.
According to sources, funds were sometimes provided as ‘project loans’, but were actually used to purchase land.
Once buyers were roped in, they would pay the builder as construction progressed. “The payment by buyers in tranches ensured that a builder would not need project finance.
For all practical purposes, besides bearing some part of the land cost (usually 30-50 per cent), the entire cost of the project was financed by the bank,” said the industry observer.
The builder just had to ensure that the financial institution had enough customers for the smooth progress of the project. Sometimes, the builder would get loans at a lower interest at the very outset, if they promised enough customers.