| Building blocks
Calcutta, May 21: The Reserve Bank of India (RBI) has asked commercial banks to be more ‘vigilant’ while disbursing housing loans. They have also been asked to ensure that the documents are in order before clearing loan proposals.
The concern of the central bank was communicated at a recent meeting that RBI deputy governor G. P. Muniappan held with the bankers.
The central bank has also asked public sector banks to consult legal experts before sanctioning a loan.
RBI’s advice assumes significance in the backdrop of recent media reports about alleged misuse of housing loans by some borrowers.
Confirming the move, an RBI spokesperson said, “The central bank has noticed that some borrowers have used housing loans from banks and finance companies for commercial purposes. These incidents have happened in Kanpur and Lucknow.”
“It has also come to our notice that housing loans are being obtained against fake house deeds. The RBI has asked banks not to indulge in an unhealthy rate war to attract customers,” she added.
This is a cause for concern as the housing sector had witnessed tremendous growth in the recent past and the regulator had asked banks to show some discretion before granting housing loans, an RBI official said.
Banks are now quite aggressive in granting housing loans. Some public sector banks have reported a significant growth in their housing loan portfolios. Though the growth in this sector is welcome, banks should ensure that the funds are not misused, the spokesperson added.
Spooked by a low credit offtake, banks, over the last couple of years, have increased their focus on the home-loan market, which is considered to be quite safe.
The determinants of success in the home-loan business are an ability to maintain a strong control on credit standards, access to low-cost long-term funds and low operating costs.
RBI officials said: “Another important issue in housing finance is risk management. It is important to effectively manage all types of risks — maturity risk, interest rate risk, foreign exchange risk and credit. Banks have an access to funds from savings accounts, current accounts and term deposits. Current account comprises corporate money and is totally unstable.”
They further clarified that in a falling interest rate regime, it might be easier to borrow short-term and lend long-term, but there is a huge risk involved in taking a position on interest rates.
“If interest rates were to rise suddenly, on maturity, the shorter duration old borrowings will have to be refinanced/refunded out of fresh borrowings at a higher interest rate, whereas long-term assets have already been created at a certain rate. This kind of mismatch must be avoided. Keeping this in mind, the central bank has asked the bankers to be more cautious while lending,” the officials added.