What changed
RBI observed UCBs offering innovative housing loan schemes (e.g., 80:20, 75:25) where sanctioned loans were disbursed upfront to builders without linking to construction stages. The circular explicitly prohibits such upfront disbursal for incomplete or green field housing projects and mandates stage-linked disbursement.
What it means for you
UCBs must now ensure every housing loan disbursal is tied to physical progress of construction, eliminating lump-sum payments to builders. This reduces risk of fund diversion, protects borrowers from credit score damage due to builder defaults, and aligns with customer suitability norms. Banks need to revise product structures and tripartite agreements accordingly.
What you must do
- Review all existing housing loan products and discontinue any upfront disbursal schemes for under-construction projects.
- Implement stage-linked disbursement mechanisms with clear verification of construction progress before each tranche.
- Update tripartite agreements to reflect that builders cannot service interest/EMI on behalf of borrowers without explicit risk disclosure.
- Ensure customer suitability assessments and risk disclosures are made for all housing loan products, especially innovative ones.
- Train credit and operations teams on the new disbursal norms and monitor compliance through internal audits.
Who it affects
Primary (Urban) Co-operative Banks (UCBs), Home loan borrowers of UCBs, Builders and developers partnering with UCBs for housing projects, Credit information companies (CICs) receiving loan servicing data
What exactly is prohibited under this circular?
UCBs cannot disburse the entire sanctioned housing loan amount upfront to builders for incomplete or under-construction projects. Disbursals must be linked to stages of construction.
Does this apply to completed housing projects?
No, the restriction is specifically for incomplete, under-construction, or green field housing projects. Completed projects are not covered.
What if a builder defaults on interest payments on behalf of the borrower?
Such defaults can negatively impact the borrower's credit score with CICs. The circular highlights this risk and requires banks to ensure borrowers are fully aware of liabilities.