Reserve Bank of India debars banks from giving upfront 80:20 loans for under-construction projects

Reserve Bank of India debars banks from giving upfront 80:20 loans for under-construction projects


The RBI has barred banks from giving upfront loans for under-construction projects through schemes like 80:20. Providing such loans help a bank as they are classified as mortgage and not construction finance which is considered a risky business by the RBI and requires higher provisioning. The builder too gains as home loans are far cheaper than construction loans.

Nearly 25% of loan disbursements for new flats in Mumbai are under such schemes. While builders said the RBI's move would hit economic growth, construction finance entails higher risks and, therefore, such risks have to be built into the pricing. Construction finance should not, through any innovative structuring, be available to developers at the rate of interest being offered on individual home loans. Further, to pay upfront construction finance to developers even before the ground is broken is dangerous.


Some feel the RBI's decision will bring down prices. It is a good decision as the government has sought to warn buyers who are tempted by the attractive 80:20 scheme, thinking they are getting a good discount. In reality, this scheme is quite complicated and does not clarify how much discount the developer is giving the buyer. The RBI's decision will force developers and banks to be more transparent in explaining the benefits of the scheme to buyers. It will force developers to give a prospective buyer a discount upfront instead of spreading it across 2 to 3 years as in the 80:20 scheme. But builders are greatly upset by the move. More details here.

What are the norms regarding the 20: 80 scheme?

The 20-80 scheme means that the buyer of the flat has to pay 20% of the price of the flat upfront and the remaining 80% on possession. This could work in two different ways.

1. The buyer takes a loan for 80% of the price of the flat. The terms of the loan are such that he pays nothing till possession, and the installments start once he gets the possession.

2. The payment terms between the buyer and seller are structured in a way that remaining 80% of the price of that flat are paid on possession. There is no loan involved in the transaction.

How does loan under 20: 80 scheme differ from a normal home loan? 


For a normal home loan, the borrower needs to pay a monthly installment, which could be only the interest in the loan availed (pre-EMI), or an interest with some principal repayment (EMI). In a 20:80 scheme there is no installment payable.

Reserve Bank of India asks banks to link home loans to stages of construction

Reserve Bank of India asks banks to link home loans to stages of construction


The Reserve Bank asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of "innovative" housing financing schemes.

"In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses...," an RBI notification said.

Upfront disbursal "should not be made in cases of incomplete/under-construction/green field housing projects".

The notification follows the introduction by some banks of "innovative housing loan schemes" in association with developers/builders, where upfront disbursal of housing loans is made to builders without being linked to the various stages of construction.

Also, under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period. These loan products, the RBI said, are popularly known by names such as 80:20 and 75:25 schemes.

The RBI said such home loan products are likely to expose banks and their borrowers to additional risks.

The risks include disputes between borrowers and builders; default and delayed payment of interest/EMI by the builder on behalf of the borrower, and non-completion of the project on time.

"Further, any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies...," according to the RBI notification.

The central bank said that in cases where bank loans are disbursed upfront on behalf of individual borrowers in a lump-sum to developers without any linkage to construction stages, banks run disproportionately higher exposures with concomitant risks of fund diversion.

Banks introducing any kind of product should take into account customer suitability and appropriateness and ensure that borrowers and customers are made fully aware of the risks and liabilities, the RBI said.

With effect from June 21, the RBI revised the loan-to-value (LTV) ratio, which determines how much the banks can finance. For loans of up to Rs 20 lakh, banks can lend up to 90 per cent, while the borrower has to pay 10 per cent.


For home loans between Rs 20 lakh and Rs 75 lakh, the LTV ratio is 80:20 while for loans above Rs 75 lakh, it is 75:25. The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction.

Major highlights of Real Estate Regulation Bill - Will it bring down property prices?

Major highlights of Real Estate Regulation Bill - Will it bring down property prices?

It has been 5 yrs when the first draft of Real Estate Regulatory Bill came and then there were many amendments in it over the years. However on 4th June 2013, it was passed by cabinet and now the next step is to table it in parliament this monsoon season and if our country people are really lucky, it may finally become an ACT of law.

Some major highlights of the Real Estate Regulation Bill

1. Mandatory to acquire all clearances before the launch
2. Use of Photograph of actual site for advertisements
3. Sale of property as per prices linked with Carpet Area
4. State Level Regulators and central appellate tribunal to be set up
5. Real Agents/Dealers needs to register themselves
6. Separate bank accounts for every project
7. Builders cant take more than 10% advance without a written Agreement
8. Full refund with interest, if property not handed over time

It will be difficult to guess if this will help bring down the property prices, but it will certainly bring in more transparency in the Real Estate business and help buyers keep themselves well informed.