Home Loan Upfront Disbursal Banned by RBI; Real Estate Prices Could Correct

If you thought the real estate market was inflated, RBI's latest move on retail home loans might go some way in forcing price correction. The central bank has banned banks from disbursing loans upfront in case of under-construction properties and advised banks to link loan disbursal to construction stages.

Some banks had introduced exotic schemes having names like 80:20, 75:25 for homebuyers in collaboration with builders. The entire loan would be sanctioned upfront with the buyer paying up 20-25% and remaining 80-75% of the loan being paid to the builder or developer who would pay interest until property is possessed by the buyer.

Though the innovative schemes seem harmless and even a convenient arrangement for that at first sight, they could have negative repercussion on homebuyers. Such loans pose high risk both to banks and homebuyers in situations like dispute between builder and buyer, builder defaulting on repayment, delay in project completion etc. Since credit history of borrowers is maintained by Credit Information Companies like CIBIL, the builder defaulting on repayment terms could tamper credit history of the borrower.

Upfront disbursal arrangement gave developers the scope of artificially raising price of property by giving buyer a discount for interest burden shared by the developer. On the other hand builders are of the view that they bearing interest burden in pre-construction period was good for homebuyers since they would not have to worry about construction delay.

Another important consideration from banks' security point of view is that builders and developers get access to financing at a lower cost riding on the back of homebuyers. Real estate loans are risky assets for banks and interest rates are much higher compared to home loan rates for buyers.

80-20 and 75-25 home loan schemes were quite popular in Mumbai, NCR and some southern cities, according to a real estate expert. With RBI's ban, real estate inventory in these cities would rise by as much as double. Couple this with the real estate sector being brought under a regulator; price correction is bound to happen eventually.


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