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RBI asks commercial banks not to overvalue houses while providing loans

Please refer to our circular DBOD.No.BP.BC.69/08.12.001/2010-11 dated December 23, 2010 on “Housing loans by commercial banks – LTV ratio, risk weight and provisioning” wherein it was advised that in order to prevent excessive leveraging, the LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small value housing loans i.e. for loans below Rs. 20 lakh (which are classified as priority sector advances) the LTV ratio should not exceed 90 per cent.

The Reserve Bank of India (RBI) has asked all commercial banks to refrain from overvaluing houses while providing loans. In a notification issued from Mumbai today, RBI has noticed that some banks include stamp duty, registration and other documentation charges in the cost of the house property, thereby overstating the realisable value of the property.

The notification adds that by following such practice the banks are consequently diluting their stipulating margins. Accordingly, RBI has asked banks not to include these charges in the cost of the housing property they finance so that the effectiveness of Loan to Value norms is not diluted.

Concerned over excessive flow of banking funds to the real estate sector, RBI had in 2010 issued guidelines directing the lenders to provide loans only up to 80 per cent of the cost of property. However, in case of small value housing loans of up to Rs 20 lakh, banks can provide loans up to 90 per cent of the property value.

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RBI/2011-12/383
DBOD.No.BP.BC. 78 /08.12.001/2011-12

February 03, 2012

The Chairmen and Managing Directors / Chief Executive Officers of
All Commercial Banks
(Excluding Regional Rural Banks)

Dear Sir/ Madam

Housing Loans by Commercial Banks – Loan to Value (LTV) Ratio

Please refer to our circular DBOD.No.BP.BC.69/08.12.001/2010-11 dated December 23, 2010 on “Housing loans by commercial banks – LTV ratio, risk weight and provisioning” wherein it was advised that in order to prevent excessive leveraging, the LTV ratio in respect of housing loans should not exceed 80 per cent. However, for small value housing loans i.e. for loans below Rs. 20 lakh (which are classified as priority sector advances) the LTV ratio should not exceed 90 per cent.

2. In this connection, it has been brought to our notice that banks adopt different practices for deciding the value of the house property while sanctioning housing loans. Some banks include stamp duty, registration and other documentation charges in the cost of the house property. This overstates the realisable value of the property as stamp duty, registration and other documentation charges are not realisable and consequently the margin stipulated gets diluted. Accordingly, banks should not include these charges in the cost of the housing property they finance so that the effectiveness of LTV norms is not diluted.

Yours faithfully,

(Deepak Singhal)
Chief General Manager-in –Charge

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