MASTER CIRCULAR

RBI/2006-07/57

Chief Executive Officers of
All Primary (Urban) Co-operative Banks 

Dear Sir/Madam,

Master Circular on    Finance For Housing Schemes-UCBs

Please refer to our Master Circular UBD.BPD.(PCB). MC. No. 2 /09.22.01/2005-06August 11, 2005  on the captioned subject (available at RBI website www.rbi.org.in). The enclosed Master consolidates and updates all the instructions/guidelines on the subject up to June 30, 2006 

2.         Please acknowledge receipt of this Master Circular to the Regional Office concerned of this Department.

Yours faithfully,

(N.S Vishwanathan)
Chief General Manager-in-charge
Encl: As above

Master Circular

Finance For Housing Schemes

Contents  

The role of primary (urban) co-operative banks (PCBs) in providing housing finance has been reviewed from time to time. These banks, with their vast network, occupy a very strategic position in the financial system and have an important role to play in providing credit to the housing sector. Further, housing finance to specified categories up to prescribed limits is treated as priority sector lending, and the need for PCBs providing credit to priority sector has come to be increasingly recognised consistent with the social objectives placed before the banking system.

Therefore, with a view to enabling the PCBs to play a more positive role in providing finance for housing schemes, particularly to the weaker sections of the community, these banks are permitted to grant loans for housing schemes up to certain limits from their own resources subject to the guidelines detailed hereunder.

The bigger banks who have large surplus resources should undertake larger lending for housing purpose, as this will provide a remunerative avenue for investment of their surplus funds.

Wherever, banks are still required to obtain special permission of the Registrar for financing housing societies, in each and every case, it is suggested that these banks should obtain general permission to finance housing societies subject to such other terms and conditions as have been prescribed for the purpose.

Education, health, social, cultural or other institutions/centres which are part of a housing project and considered necessary for the development of settlements or townships;

Shopping centres, markets and such other centres catering to the day-today needs of the residents of the housing colonies and forming part of a housing project;

Finance provided by the PCBs to the eligible categories of borrowers for eligible housing schemes will be subject to the following terms and conditions:

 PCBs based on their commercial judgement and other prudential business considerations, with the approval of their Board of Directors, are free to identify the eligible borrowers, decide margins and grant housing loans depending upon repaying capacity of the borrowers.

The maximum loan should not exceed 15 percent of capital funds of the bank in case of individual borrowers and 40per cent of the capital funds in case of group of borrowers.The capital funds for the purpose shall include both Tier I Capital and Tier II capital.

Banks may, with the approval of their Boards, determine the rate of interest, keeping in view the size of accommodation, degree of risk and other relevant considerations.

Banks may formulate, with the approval of their Boards, transparent policy for charging penal interest rates to be levied for reasons such as default in repayment, non-submission of financial statements, where applicable, etc. The policy should be governed by well accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers.

Where this is not feasible, banks may accept security of adequate value in the form of LIC policies, Government Promissory Notes, shares/debentures, gold ornaments or such other security as they deem appropriate.

Housing loans may be repayable within a maximum period of 15 years, including moratorium or repayment holiday.

till completion of constructions, or 18 months from the date of disbursement of first instalment of the loan, whichever is earlier.

 The instalments should be fixed on a realistic basis taking into account the repaying capacity of the borrower. For this purpose, the outgo on account of housing loan repayment (including principal and interest) should not normally exceed 30 per cent of the borrower's income.

 In order to make housing finance affordable, banks may consider fixing the instalments on a graduated basis, if there is reasonable expectation of growth in the income of the borrower in the coming years. Graduated basis means fixing lower repayment instalments in the initial years and gradually increasing the instalment amount in subsequent years coinciding with expected increase in income in the subsequent years.

PCBs may extend additional finance to carry out alterations, additions, repairs to houses/flats already financed by them subject to repayment capacity of borrowers.

 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 credit 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 after due assessment of aggregate repayment capacity of borrowers.

The banks may also extend need-based credit up to a maximum of Rs.1.00 lakh in rural and semi-urban areas and Rs.2.00 lakh in urban areas to the owner of a house/flat only for repairs, additions, alterations, etc., irrespective of whether the house/flat is owner occupied or tenant occupied, after obtaining such security as the bank may deem appropriate. They should satisfy themselves regarding the estimated cost of repairs, additions, etc. having regard to the extent of such repairs or additions, materials to be used, cost of labour and other charges and after obtaining certificate/s from qualified engineers/architects in respect thereof, considered necessary.

The terms and conditions relating to margin, interest rates, repayment period etc. in respect of additional/supplementary finance may be same as indicated in respect of loans for construction/acquisition.

PCBs may extend loans to housing boards within their states. The rate of interest to be charged on the loans to such boards may be fixed at the discretion of the banks.

While extending loans to housing boards, banks may not only keep in view the past performance of the housing boards in the matter of recovery from the beneficiaries but should also stipulate that the boards will ensure prompt and regular recovery of loan instalments from the beneficiaries.

PCBs may utilise up to 15 per cent of their total deposit resources to provide housing loans and other block capital loans.

However, the above limit may be exceeded to the extent of funds obtained for the purpose from higher financing agencies and refinance from the National Housing Bank.

The builders/contractors generally require huge funds, take advance payments from the prospective buyers or from those on whose behalf construction is undertaken and, therefore, they may not normally require bank finance for the purpose. Any financial assistance extended to them by primary (urban) co-operative banks may result in dual financing. The banks should, therefore, normally refrain from sanctioning loans and advances to this category of borrowers.

However, where contractors undertake comparatively small construction work   on their own, (i.e. when no advance payments are received by them for the purpose), the banks may consider extending financial assistance to them against the hypothecation of construction materials, provided such loans and advances are in accordance with the by-laws of the bank and instructions/directives issued by the Reserve Bank from time to time.

Banks should undertake a proper scrutiny of the relevant loan applications, and satisfy themselves, among other things, about the genuineness of the purpose, the quantum of financial assistance required, creditworthiness of the borrower, his repayment capacity, etc. and also observe the usual safeguards, such as, obtaining periodical stock statements, carrying out periodical inspections, determining drawing power strictly on the basis of the stock held, maintaining a margin of not less than 40 to 50 percent, etc. They should also ensure that materials used up in the construction work are not included in the stock statements for the purpose of determining the drawing power.

Banks may also take collateral security, wherever available. As the construction work progresses, the contractors will get paid and such payments should be applied to reduce the balance in the borrowal accounts. If possible, the banks could perhaps enter into a tripartite agreement with the borrower and his clients, particularly when no collateral securities are available for such advances.

Loans up to Rs. 1.00 lakh for repairs, additions or alterations by individuals in rural and semi urban areas and upto Rs.2.00 lakh in urban areas

(a)         for construction of houses exclusively for the benefit of scheduled castes and scheduled tribes, subject to a ceiling of Rs. 5 lakhs of loan amount per housing unit, or

Assistance given to a non-governmental agency approved by the National Housing Bank for the purpose of refinance for construction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.

Investments made by PCBs in bonds issued by NHB/HUDCO exclusively for financing of housing, irrespective of the loan size per dwelling unit will be reckoned for inclusion under priority sector advances.

Assistance given to any governmental agency for the purpose of construction of houses exclusively for the benefit of scheduled castes and scheduled tribes, subject to a ceiling of Rs. 2 lakhs per unit and all advances for slum clearance and rehabilitation of slum dwellers would be classified as weaker section advances.

A number of cases have come to the notice of Reserve Bank, where unscrupulous   persons have defrauded   the banks by obtaining   multiple bank finance against the same property by preparing a number of   sets of the original documents and submitting the same to various banks for obtaining   housing finance. Similarly the salary certificate of employees of certain public sector   undertakings   were fabricated, so as to match the requirement of   banks for availing higher amounts of loan. The estimates given were also on the higher  sides, so as to avoid contribution of margin money by the borrowers.  

Such frauds could take place on account of the laxity on the part of the bank officials to follow the laid down procedures for verifying the genuineness of the documents submitted by the borrowers independently through their own advocates / solicitors. The banks should, therefore, to take due precaution while accepting various documents.

The risk weights for banks’ exposure on housing loans which are fully secured by mortgage of residential housing properties, extended to individuals by banks is 75  %  for capital adequacy purposes.

The risk weights on banks’ exposure to the builders and contractors for commercial real estate  at present is 150 %.  Commercial real estate exposure for the purpose will include fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels etc)

The risk weight for loans and advances to co-operative / group housing societies and Housing Board and for any other purpose is  100%.

 Bureau of Indian Standards (BIS) has formulated a comprehensive building Code namely National Building Code (NBC) of India 2005, providing guidelines for regulating the building construction activities across the country.  The Code contains all the important aspects relevant to safe and orderly building development such as administrative regulations, development control rules and general building requirements; fire safety requirements; stipulations regarding materials, structural design and construction (including safety); and building and plumbing services. Adherence to NBC will be advisable in view of the importance of safety of buildings especially against natural disasters.  Banks' boards may consider this aspect for incorporation in their loan policies. Further information regarding the NBC can be accessed from the website of Bureau of Indian Standards (www.bis.org.in).

Appendix

UBD.BPD.PCB.No.31/09.09.01/

2002-03 

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