What changed
RBI clarified that UCBs must not extend any fund-based or non-fund-based facilities to builders/contractors for land acquisition, even within housing projects. It also prohibited the practice of valuing land collateral based on discounted developed property value minus development cost; only current market price is acceptable.
What it means for you
UCBs must immediately cease financing land purchases for builders/contractors, tightening a long-standing restriction. This prevents speculative lending and ensures collateral valuation is conservative and transparent, reducing risk for banks. Lenders need to review existing exposures and valuation methods to comply.
What you must do
- Stop all new fund and non-fund facilities to builders/contractors for land acquisition, including within housing projects.
- Revalue any land collateral currently accepted from builders/contractors at current market price only, not discounted future value.
- Review existing builder/contractor loan portfolios to identify and rectify any non-compliant land valuations or land acquisition financing.
- Update internal credit policies and valuation guidelines to reflect this clarification immediately.
Who it affects
All Primary (Urban) Co-operative Banks (UCBs), Builders and contractors seeking credit from UCBs, UCB credit and risk management teams
Can UCBs still lend to builders/contractors for small construction work?
Yes, but only if the contractor undertakes the work on their own (no advance payments) and the loan is against hypothecation of construction materials, per bye-laws and RBI directives. Land acquisition financing is strictly prohibited.
How should land collateral be valued for builder/contractor loans?
Land accepted as collateral must be valued at its current market price only. Using a discounted value based on future developed property value minus development cost is not allowed.
Does this circular apply to housing project loans for builders?
Yes, even as part of a housing project, UCBs cannot extend fund or non-fund facilities to builders/contractors for land acquisition.