Master Circular on Housing Finance: Consolidated Guidelines for Banks
The Reserve Bank of India (RBI) has released a revised Master Circular on Housing Finance, consolidating instructions and guidelines issued up to March 31, 2024. This circular is a statutory directive under Sections 21 and 35A of the Banking Regulation Act, 1949, applicable to all Scheduled Commercial Banks, excluding Regional Rural Banks.
Purpose and Scope
The purpose of the Master Circular is to consolidate the framework of rules, regulations, and clarifications on Housing Finance. It aims to provide a comprehensive reference for banks to ensure that their housing finance policies align with RBI guidelines.
Key Highlights
Introduction
Banks play a crucial role in providing credit to the housing sector due to their extensive branch networks across the country. This positions them strategically within the financial system to support housing finance.
Acquisition of Land
Banks can finance the purchase of plots only if the borrower declares the intention to construct a house on the plot within a specified period.
Construction of Building / Ready-Built House
Banks may grant loans for various purposes, including:
- Purchase/construction of a dwelling unit per family.
- Repairs to damaged dwelling units.
- Purchase of a second house for self-occupation.
- Buying a house for rental purposes due to job relocation.
- Buying an old house currently occupied as a tenant.
Loans for improving slum areas or implementing slum improvement schemes through Slum Clearance Boards and other public agencies are also permissible.
Conditions for Construction Loans
Banks must adhere to specific conditions to prevent unauthorized construction:
- Obtain a sanctioned plan from the competent authority.
- Secure an affidavit-cum-undertaking from the borrower to ensure compliance with the sanctioned plan.
- Engage an architect to certify the construction stages and completion.
Supplementary Finance
Banks may provide additional finance for alterations, repairs, and improvements to already financed properties, subject to specific conditions.
Lending Restrictions
Banks are prohibited from financing:
- Construction of buildings for government or semi-government offices.
- Projects by public sector entities not run on commercial lines.
- Term loans to corporations for non-commercial residential projects.
Lending to Housing Intermediary Agencies
Banks can extend finance to public agencies for land acquisition and development, but not to private builders. Term loans can be granted to housing finance institutions, housing boards, and other public agencies based on their performance and recovery track record.
Quantum of Loan
The Loan to Value (LTV) ratios and risk weights for housing loans are specified to ensure uniformity. Banks should exclude stamp duty, registration, and other charges from the property cost when calculating the LTV ratio.
Innovative Housing Loan Products
Banks should link loan disbursals to construction stages to mitigate risks associated with innovative loan schemes like 80:20 or 75:25.
Rate of Interest and Approvals
Interest on housing finance must comply with RBI’s Master Direction on Interest Rates. Banks should ensure borrowers obtain necessary statutory and regulatory approvals before disbursal.
Conclusion
The revised Master Circular on Housing Finance by RBI aims to streamline housing finance policies across banks, ensuring responsible lending practices and mitigating risks associated with housing loans. By consolidating previous instructions and guidelines, it provides a comprehensive reference for banks to support the housing sector effectively.
