RBI/2006-07/57 UBD.PCB. MC. No.6 /09.22.010/2006-07, DT. 07/07/2006

Master Circular on Finance For Housing Schemes-UCBs

Please refer to our Master Circular UBD.BPD.(PCB). MC. No. 2 /09.22.01/2005-06 August 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

1 GENERAL

1.1 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.

1.2 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.

1.3 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.

1.4 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.

2 ELIGIBLE CATEGORY OF BORROWERS

2.1 PCBs may grant loans to the following categories of borrowers:

(i) Individuals and co-operative/group housing societies.

(ii) Housing boards undertaking housing projects or schemes for economically weaker sections (EWS), low income groups (LIG) and middle income groups (MIG).

(iii) Owners of houses/flats for extension and up-gradation, including major repairs.

3 ELIGIBLE HOUSING SCHEMES

3.1 The borrowers in the above categories will be eligible for finance for the following types of housing schemes:

(i) Construction/purchase of houses/flats by individuals;

(ii) Repairs, alternations and additions to houses/flats by individuals;

(iii) Schemes for housing and hostels for scheduled castes and scheduled tribes;

(iv) Under slum clearance schemes -

(a) directly to the slum dwellers on the guarantee of the Government, or

(b) indirectly through Statutory Boards established for this purpose;

(v) 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;

(vi) 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;

4 TERMS AND CONDITIONS FOR HOUSING LOANS

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

4.1.1 Maximum Loan Amount & Margins

(i) 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.

(ii) The banks may grant housing loans up to a maximum of Rs. 15.00 lakh per beneficiary of a dwelling unit.

(iii) 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.

4.1.2 Interest

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.

4.1.3 Charging of Penal Interest

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.

4.1.4 Security

(i) PCBs may secure housing loans either

(a) by mortgage of property, or

(b) by government guarantee where forthcoming, or

(c) by both.

(ii) 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.

4.1.5 Period of Loan

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

(ii) The moratorium or repayment holiday may be granted -

(a) at the option of the beneficiary, or

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

4.1.6 Graduated Instalments

(i) 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.

(ii) 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.

5 ADDITIONAL/SUPPLEMENTARY FINANCE

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

5.2 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.

5.3 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.

5.4 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.

6 LENDING TO HOUSING BOARDS

6.1 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.

6.2 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.

7 AGGREGATE LIMIT FOR HOUSING FINANCE

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

7.2 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.

8 ADVANCES TO BUILDERS/CONTRACTORS

8.1 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.

8.2 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.

8.3 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.

8.4 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.

8.5 Such finance should not be treated as housing finance.

9 HOUSING LOANS UNDER PRIORITY SECTOR

The following type of loans for housing purposes are eligible for categorisation under Priority Sector :

(i) Loans up to Rs.15lakhs for construction of houses by individuals.

(ii) 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

(iii) Assistance given to any governmental agency -

(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

(b) for slum clearance and rehabilitation of slum dwellers.

(iv) 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.

9.1 Investments in Bonds

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.

9.2 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.

10. PRECAUTIONS

10.1 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.

10.2 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.

11. RISK WEIGHT ON REAL ESTATE EXPOSURE

11.1 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.

11.2 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)

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

12. NATIONAL BUILDING CODE-

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

MASTER CIRCULAR - FINANCE FOR HOUSING SCHEMES

A. List of Circulars consolidated in the Master Circular

No.	Circular No.	Date	Subject
1	UBD.PCB.Cir.no.58/09.09.01/05-06	19.06.2006	Adherence to National Building Code (NBC)-specifications necessary for lending institutions.
2.	UBD.PCB.Cir.No.55/09.11.600/05-06	01.06.2006	Annual Policy Statement for the year 2006-07-risk weight on exposures to commercial real estate.
3	UBD.PCB.Cir.No. 8/09.11.600/05-06	09.08.2005	Prudential Norms on capital adequacy-risk weigh on housing finance/commercial real estate exposures.
4.	UBD. BPD(PCB)Cir 29/09.09.01/2004-05	14.12.2004	Priority sector lending-Housing Loan-enhancement of ceiling for UCBs
5	UBD.PCB.No.30 / 09.22.01/2003-04	16.01.2004	Frauds by deposit of fake title deeds of the property / fake salary certificates in housing loans
6.	UBD.BPD.No.45/ 09.09.01/2002-03	14-05-2003	Credit Policy for the year 203-04-Priority Sector Advances
7.	UBD.BPD.PCB.No.31/09.09.01/2002-03	30-12-02	Priority Sector Advances
8.	UBD.No.Plan.Cir.RCS.2/09.22.01/98-99	15-03-1999	Finance for Housing Schemes - Primary (Urban) Co-operative Banks
9.	UBD.No.Plan/.RO.49/09.22.01/97-98	17-06-1998	Finance for Housing Scheme - Primary (Urban)Co-operative Banks
10.	UBD.No. Plan .CIR(RCS).9/09.22. 01/95-96	01-09-1995	Finance for Housing Schemes - Primary (Urban) Co-operative Banks
11.	UBD.No.Plan.CIR(RCS)8/09.22.01/94-95	11-01-1995	Finance for Housing Schemes - Primary (Urban) Co-operative Banks
12.	UBD.No.P&O.10/UB-31/91-92	26-03-1992	Finance for Housing Schemes - Primary (Urban) Co-operative Banks
13.	UBD.No.P&O.108/UB.31-88/89	05-04-1989	Finance for Housing Schemes - Primary (Urban) Co-operative Banks
14.	UBD.DC1/R.1-87/88	03-07-1987	Maximum Limit on Advances
15.	UBD.No.(DC)2/R.1-87/88	03-07-1987	Maximum Limit on Advances
16.	DBOD.UBD.P&O.161/UB.31-83/84	02-09-1983	Urban co-operative bank finance for housing schemes
17.	DBOD.UBD.P&O.229/UB.31-82/83	05-11-1982	Co-operative bank finance for housing schemes
18.	DBOD.UBD.P&O 230/UB.31-82/83	05-11-1982	Co-operative bank finance for housing schemes for the economically weaker sections of the community
19	ACD.Plan.(SZ)401/PR.338-81/2	17-08-1981	Co-operative Bank Finance For Housing Schemes
20	ACD.Plan.1502/PR.338-76/7	11-10-1976	Co-operative bank finance for housing schemes for the economically weaker sections of the community
21	ACD.Plan.(781)/PR.338-76/77	24-08-1976	Co-operative bank finance for housing schemes for the economically weaker sections of the community

B. List of Other Circulars from which instructions relating to Housing Finance have also been consolidated in the Master Circular

No.	Circular No.	Date	Subject
1	UBD.DS.CirNo.44/13.05.00/2004-05	15.04.2005	Maximum Limit on Advances - Limit on Credit Exposure
2	UBD.No.DS.CIR.31/13.05.00/99-2000	01-04-2000	Maximum Limit on Advances - Limit on Credit Exposure
3	UBD.Plan.PCB./7/09.09.01/99-2000	22-12-1999	Priority Sector lending-Housing Finance
4	UBD.No.Plan.PCB24/09.09.01/97-98	01-12-1997	Priority Sector Lending by Primary (Urban) Co-operative Banks
5	UBD.No.DS.PCB.CIR.39/13.05.00/95-96	16-01-1996	Maximum Limit on Advances by Primary (Urban) Co-operative Banks
6	UBD.No.Plan.(PCB)6/09.09.01/94-95	22-07-1994	Priority Sector Lending by Primary (Urban) Co-operative Banks
7	UBD.No.Plan.68/09.09-01/93-94	09-05-1994	Priority Sector Lending by Primary (Urban) Co-operative Banks
8	UBD.DC.536/R.1-84/84	16-10-1984	Maximum Limits on Advances

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