MUMBAI | BUREAU | Published on July 5, 2016 | Hindu Business Line
If a builder delays delivering on the housing project or does not deliver at all, then the home loan becomes an albatross around the home buyers’ neck. Says if much of the loan is released upfront, builders may use the funds to repay old high-cost loans and for other projects
Fearing diversion of funds by builders under ‘innovative’ financing schemes — ‘10:80:10’ and ‘5:90:5’ — offered to home buyers, the National Housing Bank has warned housing finance companies against making upfront loan disbursals without linking the same to the stages of construction of housing projects or else they could attract penal provisions.
National Housing Bank (NHB), the regulator of housing finance companies (HFCs), said it has come to its notice that some HFCs are making such upfront disbursals.
Some HFCs have also approved certain projects for the advance disbursement facility.
What has caught the regulator’s eye is that some builders are actually taking advantage of these schemes to source funds at low interest rates at the expense of the home buyer. The fear is that these funds could either be used to repay old high-cost loans or get diverted to other projects.
Now, if a builder delays delivering on the housing project or does not deliver at all, then the home loan becomes an albatross around the home buyers’ neck.
How the scheme works
Once a builder gets a housing project and financing scheme approved by an HFC, the home buyer is lured with sales pitch that he needs to only come up with 5 or 10 per cent of the value of the house as his own equity.
The buyer gets a loan for 90 or 80 per cent of the value of the house from the HFC. And the balance 5 or 10 per cent own equity can be brought in by the buyer on completion of the project.
The builder promises to service the equated monthly instalment on the loan that is disbursed upfront by the HFC till the buyer gets possession of his house. Now, for the builder this arrangement is beneficial as he gets funds at home loan rates, of 9.40 per cent to 11.75 per cent.
In sharp contrast, if the builder were to approach a bank or an HFC for a loan for a residential project, he would be charged 15-16 per cent. If he taps the informal sources, the interest rate would be double what is charged by banks and HFCs.
NHB is worried that if the builder diverts the funds into other projects/repays old loans and delays the existing project, then the home loan borrower could get into trouble and this could have repercussions for HFCs.
The housing finance regulator, in a circular to HFCs, emphasised that disbursal of housing loans should be strictly linked to the stages of construction and no upfront disbursal should be made in case of incomplete/un-constructed projects.
NHB said the prevalent (financing) scheme(s) of HFCs, if any, need to be reviewed in order to remove inappropriateness of funding exposure with concomitant risk of diversion of funds.
The regulator warned that any non-compliance in this regard will be viewed seriously and may attract penal provisions.
Source : http://goo.gl/PTZrPB
The platform owners & investors hail the move as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan & Israel
Anup Roy & Abhijit Lele | Mumbai | April 29, 2016 Last Updated at 00:25 IST | Business Standard
The Reserve Bank of India (RBI) on Thursday came up with a discussion paper on peer-to-peer lending (P2P), seeking to regulate the fast emerging crowdfunding platforms as the new financing model has assumed importance too significant to be ignored.
Interestingly, the platform owners and investors welcomed the development as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan and Israel.
“Any space where money changes hand should be regulated. Regulation is good for the industry, but it should be light regulation” said Mohandas Pai, former board member of Infosys and investor in Faircent.com, a P2P lending platform. “Regulation will help us in our business and we can approach the court of law as legal entities for our needs and even for recovery,” said Bhavin Patel, co-founder of LenDen Club, a P2P platform.
In fact, RBI itself is aware of this and sounded a little hesitant in giving this recognition to the business model. But the central bank officials, including Governor Raghuram Rajan, have said the RBI cannot remain indifferent to new innovation in financing activities and growth in P2P sector. To allow regulation, RBI’s discussion paper said the platforms should adopt a company structure that can then be regulated by the central bank. Currently, the P2P platforms are run by individuals, proprietorship, partnership or limited liability partnerships — areas outside RBI’s jurisdiction. The P2P platforms are largely technology companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them.
“Although nascent in India and not significant in value yet, the potential benefits P2P lending promises to various stakeholders (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored,” RBI said.
Presently, there are around 30 start-up P2P lending companies in India, RBI said. Globally, the cumulative lending through P2P platforms at the end of fourth quarter of 2015 reached £4.4 billion, from just £2.2 million in 2012. While banned in some countries, in some other jurisdictions, the P2P platforms are either considered part of banking, or are intermediaries.
RBI’s own discussion paper favoured the platforms to act as intermediaries, to be registered as non-banking finance companies with a minimum capital of Rs 2 crore, so that promoters have “skin in the game”. The discussion paper also sought to curtail the freedom of these companies significantly and said funds raised through the platforms should go directly from the lenders’ bank account to the borrowers’.
P2P LENDING BUSINESS
- The business size globally is £4.4 billion but nascent in India
- Completely banned in Israel and Japan but allowed elsewhere
- RBI plans to treat it as intermediary NBFC
- Minimum capital requirement is Rs 2 crore
- Should not take deposits
- Cannot show lending and borrowing funds in its balance sheet
- Money should go directly from lender to borrower
- Can only take fees, provide creditworthiness info
- Should not provide cross-border transactions
- Management should be stationed in India
Source : http://goo.gl/HB0yhG
Aparna Iyer & Vishwanath Nair | Last Modified: Fri, Dec 18 2015. 12 35 AM IST | LiveMint.com
RBI aims to make rates responsive to policy changes; change may make loans cheaper for new borrowers
Mumbai: Indian banks will soon have to price their loans based on rules announced by the central bank on Thursday in a move that is aimed at making lending rates more responsive to policy rate changes.
Starting 1 April, lenders will calculate their lending rates based on the marginal cost of funds, or the rate offered on new deposits. The new rules will likely to make loans cheaper for new borrowers. For existing borrowers, it may take as much as a year for the benefits to be transmitted.
Banks currently set their lending rates based on the average cost of funds on deposits outstanding.
Reserve Bank of India (RBI) governor Raghuram Rajan has repeatedly emphasized the need for banks to pass on interest rate cuts, saying less than half had been passed on to consumers this year.
While RBI has cut its benchmark rate by 125 basis points in 2015, lending rates have come down only by 60 basis points, RBI said in its December monetary policy review. One basis point is one-hundredth of a percentage point.
“While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions,” Arundhati Bhattacharya, chairman of the nation’s largest lender State Bank of India, said in an emailed statement. “Sufficient time has been given to banks to switch over to the new regime of marginal cost of funds-based lending rate.”
By allowing banks to move to the new system for fresh loans and giving them the option to stay with the base rate system for existing loans, lenders will be spared a one-time hit to profits, which some had feared.
The Indian banking sector has struggled through a number of rate-setting methods over the last few years and has moved from a benchmark prime lending rate (BPLR) system to a base rate (or minimum lending rate) system and now the marginal cost of funds-based lending rate (MCLR). This time around, the shift was once again driven by weak transmission of interest rate cuts.
According to the new rules, every bank will be required to calculate its marginal cost of funds across different tenors. To this, the banks will add other components including operating cost and a tenor premium. A tenor premium is the compensation for the risk associated with lending for a longer time.
Taking all these components into account, banks will then publish an MCLR for overnight loans, one-month, three-months, six-months and one-year loans. This MCLR will act as the minimum or base lending rate for that tenor of loans irrespective of the borrower.
The final lending rate will be MCLR plus the spread that banks will charge for individual categories of borrowers.
“Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances,” RBI said in a statement on Thursday.
“The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks,” it said.
Bankers said the new rules related to differentiation based on loan tenor will help them price their loans better.
“The differentiation based on tenor will be a big positive for banks as now we would be able to price our loans based on the deposits of the corresponding tenor, rather than the older practice of considering 3-6 month deposit rate for computing base rates for all loans,” said R.K. Bansal, executive director at state-owned IDBI Bank Ltd. “Now we would be able to avoid this mismatch.”
With the inclusion of shorter term MCLR rates, banks can compete with the commercial paper market as well, Bansal added.
The new rules will reduce the cost of borrowing for companies, according to a Canara Bank official, who declined to be named as he is not authorized to speak to reporters.
“This has made the lending rate framework more dynamic as different banks could have different MCLRs for different tenures,” the official of the state-run lender said
In its circular, RBI said banks should specify the dates on which interest rates would be reset for borrowers. This reset must have at least once a year but can happen more frequently as well.
“The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period,” said RBI.
Banks, however, have been given the option to keep outstanding loans linked to the base rate system even though it said existing borrowers will also have the option to move to an MCLR linked loan “at mutually acceptable terms”.
Most banks are unlikely to offer this option easily, said a banker who declined to be identified, which means that any immediate hit to profitability may be avoided.
“We don’t expect much of an impact on margins since the existing loans have been left untouched,” said Bansal.
Certain loans such as those extended under government schemes or under restructuring package, advances to banks’ depositors against their own deposits, loans to banks’ own employees including retired employees and loans linked to a market-determined external benchmark will be exempt from the MCLR rule, RBI said.
Fixed-rate loans granted by banks will also be exempt from MCLR. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.
RBI had mooted adoption of marginal cost of funds for calculation of lending rates in its April policy citing lack of effective transmission of its rate cuts into bank base rates. Bankers cited the stickiness of deposit rates and lack of credit demand as reasons for the delay in passing on lower rates.
“There might be short-term problems when dealing with the new norms as banks might want to offer better spreads to their larger customers who can negotiate a better rate. However, once the system stabilizes, it will be more or less uniform across the board and borrowers will get rates which reflect the interest rates in the economy better,” said Vibha Batra, senior vice-president at rating company Icra Ltd.
Batra added that there could be some shuffling in the home loan segment since existing borrowers will also want to move to an MCLR-linked rate if they see that as being cheaper. Banks, however, may be reluctant to allow existing borrowers to move.
“Lenders will have to come up with better schemes to retain home-loan customers by allowing them to move to the MCLR regime,” said Batra.
Source : http://goo.gl/2RGbeJ
Dipak Kumar Dash | TNN | Dec 10, 2015, 02.58 AM IST | Times of India
Cabinet clears 20 major amendments to real estate bill
NEW DELHI: The government on Wednesday approved 20 changes in the Real Estate (Regulation and Development) Bill including a proposal for insurance of land title to protect buyers and developers from the risk of land fraud, a move which is seen to be pro-consumer.
The legislation comes after a wait of nearly three years and is expected to help regulate the unorganized sector, plug loopholes and protect buyers by setting up regulators in each state.
It has proposed a jail term up to three years or penalty or both in case of builders, one year for real estate agents and buyers for violating the orders of appellate tribunals. Another major change which is expected to benefit consumers is the condition of keeping 70% of the sale proceeds for a particular project in a separate account to meet the construction cost of that project, including the land cost. This has been done to minimize diversion of funds and ensure timely completion of projects.
Moreover, the regulatory authorities can grade projects along with grading of promoters to help buyers make the choice while booking a property.
In order to make states comply with the norms, the bill says states will have to make the rules within six months of notification of the proposed Act. Each state will establish the real estate regulator and the appellate tribunal as per the rules. The tribunal will be the final arbiter in case of disputes between a buyer and builders or promoters. Either party can approach the tribunal if the dispute is not settled by the real estate regulator.
“The provision for arranging insurance of land title will bring greater confidence in buyers and builders as well since they will get back their entire investment from the insurance company in case the title is held invalid. Such instances have happened in some cases recently,” said a housing ministry official. The bill aims to protect interest of at least 10 lakh buyers annually and promoting investments in the real estate sector.
The Cabinet approved the bill after government held rounds of meetings with all stakeholders and incorporated recommendations of the parliamentary panels. It is keen to table the bill in Parliament during the ongoing session since there is little protection for consumers in the present framework.
It also provisions that the consumer has the option to approach consumer forums at district level instead of only the regulatory authorities proposed to be set up under the bill for redressal of grievances.
Moreover, to ensure that the regulatory authorities don’t delay the cases, the bill has a provision for disposing off complaints in 60 days while no such time limit was indicated in the earlier bill. Similarly, the appellate tribunals need to adjudicate cases in 60 days as against 90 days as proposed earlier.
Some of the other key provisions of the revised bill include mandatory registration of projects of 500 sq metre area or eight flats with regulator instead of 1,000 sq metre or 12 flats as proposed earlier.
The bill has also incorporated the mandatory provision for formation of allottees associations such as RWAs within three months of allotment of majority of units so that buyers get to manage community facilities like common hall, club house and reading room.
According to the changes, the liability of promoters for structural defects has also been increased to five years from the earlier provision of two years.
Moreover, to fast-track the projects, the proposed bill has included the section for promoting single window system of clearances for real estate projects by the regulatory authorities. It also says that the allottees shall take possession of houses in two months of issuance of occupancy certificate.
The bill is also need to include quality check to avoid early dilapidation and collapse of the building causing life risk.
In order to ensure that chairmen and members of regulatory authorities and appellate tribunals do an honest job, the bill proposes barring them from taking up post-retirement jobs except in government and statutory bodies.
According to estimates 10 lakh consumers buy houses every year with an investment of about Rs 3.50 lakh crore in residential segment. About 3,200 to 4,000 new projects are launched every year. At present about 17,000 real estate projects are in progress in 26 major urban agglomerations in the country, which also will come under the ambit of the proposed bill.
Source : http://goo.gl/9HCfCx
The late fee imposed by card issuers ranges between Rs 100 and Rs 700, depending on the outstanding amount.
Mayur Shetty, TNN | Jun 14, 2014, 04.03AM IST | Times of India
MUMBAI: In a move that will bring relief to credit card holders, RBI has told banks that they can charge late fees only in the next billing cycle following a missed payment. At present, card issuing banks charge a late fee for any payment made after the due date.
The late fee imposed by card issuers ranges between Rs 100 and Rs 700, depending on the outstanding amount. For amounts above Rs 20,000, most banks charge a late fee of between Rs 600 and Rs 700. Most utility providers like electricity and telecom companies charge customers if they miss the due date. However, in the case of credit card payment the issuers charge interest for the delayed payment and in addition to this they charge a late fee payment.
This had led to a lot of heartburn among customers as they ended up paying both late fee and the interest even if they made the payment before the next bill was due.
Speaking to TOI, Pallav Mohapatra, CEO of SBI Cards, confirmed that RBI has asked banks not to impose late payment charges if the cardholder had paid before the next billing but after the due date. “It is possible that the regulator must have felt that since the cardholder is not being considered a delinquent until the next bill is unpaid, the penalty should not be charged,” he added when asked about the rationale.
In December 2013, RBI had directed banks’ credit card accounts to be treated as delinquent (a non-performing asset) only if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the next statement date. The gap between two statements should not be more than a month.
Before that, some banks took the due date specified in the statement for payment of minimum amount due to determine the overdue status while others used the subsequent billing date to determine the over-due status.
Source : http://goo.gl/sFhE2d
TNN | Nov 22, 2013, 03.12AM IST | Times of India
MUMBAI: With cases of mis-selling by banks continuing to come into light Reserve Bank of India plans to introduce the concept of ‘treat customers fairly’ (TCF) for sale of third-party products. Under the TCF norms, introduced first by UK’s Financial services authority, it is not enough for banks to merely stick to rules, they must prove that they have acted in the best interest of the customer.
“The intent and basic structure for TCF is in place in India for banking products of scheduled banks. However, it is now being considered to extend the TCF structure to third party products, viz., mutual funds, capital market and insurance products sold by banks and also extending the Ombudsman scheme to non-scheduled banks,” RBI said in a report released on Thursday.
The issue of mis-selling by banks had come to the fore with Sebi’s recent show-cause against HSBC for needlessly churning her mutual fund portfolio. Sebi found out that the unnecessary churn could only have been done to earn more commission. Under TCF guidelines it is not enough for a bank to obtain the signature of a customer on the application form, the onus is on the bank to make sure to that it is providing correct advice.
According to RBI TCF is a consumer protection policy designed to address the problem where banks know something about the product that the customer does not. “It is a regulatory initiative by which firms are required to consider their treatment of customers at all the stages of the product life-cycle, including the design, marketing, advice, point-of-sale and after-sale stages. By encouraging firms to re-evaluate their company culture and to inculcate the attitude of treating customers fairly, the outcome is likely to result in a more optimal one from the perspective of regulators, consumers and ultimately, firms,” RBI said.
The report said that the desired outcome of the TCF programme is to ensure that consumers are provided are provided products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect; and consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.
Source : http://goo.gl/Iha8A9
Manojit Saha & Somasroy Chakraborty | Mumbai/Kolkata | September 27, 2013 | Business Standard
After directing banks not to offer zero per cent finance for purchase of consumer goods, the Reserve Bank of India (RBI) might also crack the whip on home loan products offering cashback facility or EMI (equated monthly instalment) waiver, people familiar with the development told Business Standard. The banking regulator is likely to review these products so see if pricing was done in a transparent manner.
The proposed move is guided by the central bank’s objective of fair and transparent pricing of loan products. RBI wants customers are made aware of their yearly borrowing cost at the time they take loans. RBI has been in discussion with banks to evolve “annual percentage-rate mechanism’— a practice followed globally that ensures customers know the exact annual burden on them.
With interest rates staying firm, top private banks have introduced home loan products offering EMI waiver and cashback to drive retail loan demand.
In September 2012, Axis Bank had launched a housing loan scheme where a borrower was not required to pay the last 12 EMIs if he had repaid money on time.
This product – ‘Happy Ending Home Loan’ – is being offered at the same rate as a regular loan and given to new customers under the floating-rate option. The EMI waiver is offered on housing loans with initial tenure of 20 years or more after crossing the 15th year with Axis Bank.
Two months later, ICICI Bank, the country’s largest private lender, introduced a housing loan product offering borrowers one per cent cashback on every EMI for the entire tenure of the loan.
Under this scheme, cashback starts accruing from the first EMI month onwards and is credited to a customer’s account after completion of the 36th EMI month. Subsequently, the one per cent cashback is accumulated every EMI month and credited to the customer’s account after every 12th EMI month.
The bank also offered customers the option to renew their fixed-rate loans for two, three or five years at zero conversion fee, within 30 days of completion of the initial fixed rate tenure.
According to bankers, these products have been more popular among retail customers than traditional home loan products.
Sources, however, say the central bank does not appear convinced that these schemes disclose customers’ annual borrowing cost transparently.
RBI has already asked banks to discontinue zero-per-cent EMI schemes offered on purchase of consumer goods. It has also directed banks that if a customer avails of a loan to purchase a product on which the manufacturer or dealer is offering discount, the lender must pass on the benefit to the borrower, without tampering with the applicable rate of interest. Banks have also been asked to severe relations with merchants that charge fees for use of debit cards for making payments.
However, bankers have expressed concerns that these measures might hurt the retail loan demand in the current festive season
Source : http://goo.gl/2xw7bQ