The RBI, through its latest fiat handed out to banks by way of a circular dated November 3, 2011, made it mandatory for commercial real estate developers and builders to disclose information regarding mortgage of property in pamphlets, brochures, and advertisements brought out soliciting applications from the general public for purchase of plot/built space from them. What is new in this latest fiat? What has been the historical background of the RBI's action in this regard?
Real estate financing was not a priority for banks and even the regulator for many years! In fact, lending by banks against land was taboo for a long time. It was left to the Land Development Banks to provide finance against land mainly for agricultural purposes. Once the Government approved the national housing policy, housing became a priority item of activity and the RBI too started giving ‘instructions' to banks and financial institutions falling under its purview. Comprehensive instructions from the RBI were issued to banks in 2008, which was updated in 2009. Prior to this, only sporadic circulars on the subject was issued by the RBI. Banks were also given specific allocation for housing finance on an annual basis effective as on July 1 every year, based on the deposit growth.
The initial instructions to banks were to grant direct finance to individuals for building houses mostly for own occupation. In the second stage, indirect lending was permitted through intermediaries such as housing boards, housing cooperatives and similar agencies. Private builders started getting loans subsequently, on the basis of specific projects. No loan was allowed for land acquisition. Similarly, speculative investments were not allowed by utilising bank loans. When project lending was considered, the documented value of land was only considered as investment eligible for finance, together with actual cost of construction for arriving at the project cost. From personal loans, the housing loan vehicle moved to project loans and then to loans for Commercial Real Estate (CRE).
The golden goose
When banks started tasting the benefits of CRE financing as an easy way for bulk loaning, there has been a clamour for canvassing high value projects. Some developers and builders too expanded their business by launching new projects all over the country in their anxiety to corner a lion's share of the market. Naturally, some flaws crept in. Same projects were referred to more than one bank simultaneously. The banks too sanctioned many loans without verifying whether other institutions have already released amounts or not. ‘Duplicate' documentation came to light when audits and inspections/financial reviews were carried out. This lead to tightening by the RBI on the real estate lending portfolios of banks. Risk weight has also been jacked up for Non-Performing Assets (NPAs) and ceiling on lending to this sector was enforced strictly.
Increasing bad loans lead to litigations and courts were forced to make strictures on laxity in processing, follow-up and supervision.
This compelled the RBI to think of plugging the loopholes.