Tightening home loan disbursals to lower risks: Keki Mistry

Tightening home loan disbursal norms is a good move by RBI as upfront home loan disbursements brought risk to the system, says Keki Mistry, vice-chairman & CEO of HDFC. Any plan where the bank disburses money upfront and then leaves it to the builder to complete the project is fraught with risk, he explains. The risk is both to the system and even to the individual who is buying a house, he adds. He says, builders will not be able to divert these funds for other purposes now.

Also Read: Housing loans should be linked to construction stage: RBI
Earlier today, the RBI told banks not to dispense upfront the entire loan amount for a house that's still under construction. Objecting strongly to builders schemes like 80:20, the RBI today said disbursement of home loans should be closely linked to construction, and not be paid upfront to developers.
Though builders across the country have been relying on schemes like 80:20 and 75:25 to attract buyers, Mistry does not see an impact on the home loan business due to the RBI circular. Below is the verbatim transcript of Keki Mistry's interview on CNBC-TV18 Q: The Reserve Bank of India (RBI) has tightened home loan norms. What is your first reaction?
A: My first reaction is that it is very good for the system. We have always been very cautious with our disbursements. We would disburse money on a loan only after the property had been completed up to a certain stage. So the disbursement is made according to the stage of construction. Any plan in our view where you disburse money upfront and then leave it to the builder to complete the project is fraught with risk. The risk is both to the system and in my view even to the individual who is buying house.
So I would say it is a good measure from RBI. I do not think it would create any problem for anyone. The fraught which is there in the system where people are misusing the system and taking money upfront and maybe someone maybe diverting money, that kind of stuff will get stopped with what RBI has done. So we encourage it. We think it is very good. Q: What is this actually going to do to home loan off take? Just yesterday we had Mr. Parekh talk to us about how he anticipates home loan growth to continue to be robust in excess of 20 percent. Do you believe that with this notification perhaps we are going to see a decline?
A: Absolutely not. We do not have any project where we disburse money upfront based on the projected cash flow. Q: Not for you particularly, but for the sector at large.
A: These 80:20 schemes or 75:25 schemes, most of these schemes are actually schemes where the money is disbursed only based on construction. There maybe a stray case here and there or a free project here and there where a bank or a non-banking financial company (NBFC) or whoever maybe disbursing money in advance. To my knowledge there are not that many projects. So I do not see it having any material impact on growth for the system. Even these projects where money is being made upfront is largely in the big cities. Q: Confederation of Real Estate Developers' Associations of India (CREDAI) has just said in its statement, abruptly issuing such circulars, advising banks against established practices only harm the sentiments and disrupt business plans. This at the end creates a setback for projects affecting end consumers. That seems to be the voice coming in from the developers' lobby?
A: We have grown at 31 percent in the first quarter and we have always guided towards 18-20 percent growth and we believe that growth is not in anyway going to get impacted because of this change, because we have never disbursed money in advance. The risk is when you disburse money in advance, the money need not necessarily go for the construction of the project and that puts both the lender as well as individual customers who are buying the house at risk. Q: Isn't there a valid point in the argument that CREDAI is making that there should have been some sort of consultation before this notification was issued, because these schemes have now been in existence for over a year now and just about every developer, all the big names in the industry have been going down this road?
A: Just because you have a 80:20 scheme does not necessarily mean that the money is disbursed upfront to the developer. Even in a 80:20 scheme, the bank agrees to disburse 80 percent of the loan amount to the customer based on its repayment capacity, but those disbursements are made over a period of time as the property gets constructed. So it does not mean just because there is 80:20 scheme the money gets disbursed upfront. That is not the case. That is only 3-4 projects, but not with a majority of them. Q: So you believe that this will have limited impact as far as the real estate sector is concerned?
A: I think it will be a very limited impact.