The Reserve Bank of India (RBI) has revisited and streamlined the role of Primary (Urban) Co-operative Banks (UCBs) in housing finance, acknowledging their widespread network and strategic importance in the financial ecosystem.
UCBs are now encouraged to actively support housing credit, especially to weaker sections of society, aligning with the broader social objectives of inclusive financial development. Recognising the potential of surplus resources with larger banks, RBI suggests they engage in increased housing finance as a productive use of their funds.
In regions where special permission is needed from Registrars to finance housing societies, UCBs are advised to obtain general approvals to ease lending.
UCBs can lend to individuals, cooperative and group housing societies, housing boards, and property owners needing house upgrades. The scope of financing extends to construction, purchase, repairs, slum clearance, and essential institutions within housing projects, such as schools and markets.
Loans are subject to prudential exposure limits based on the tier classification of the bank, with ceilings for individual housing loans ranging from Rs 60 lakh to Rs 3 crore, depending on the tier.
Interest rates on these loans can be set by UCBs with board approval, based on risk and loan size. RBI prohibits foreclosure or prepayment penalties for floating-rate loans, and banks are required to plan for floating rate resets carefully to protect borrowers from EMI shocks.
Further, any charges for non-compliance with loan terms must be treated as penal charges rather than penal interest, in accordance with RBI’s fair lending practices. UCBs must issue a Key Facts Statement (KFS) to borrowers and comply with detailed security norms, which may include property mortgages or alternate forms such as insurance policies or gold.
The maximum tenure for housing loans is 20 years, with a moratorium allowed until the earlier of 18 months from the first disbursal or project completion. Graduated EMIs may be offered to make repayments easier for borrowers whose income is expected to grow.
The overall housing loan exposure of a UCB must not exceed 25% of its total loans, with real estate lending capped at 5%, excluding priority sector housing loans. Projects involving mixed-use spaces may still be considered residential if commercial areas do not exceed 10% of the total built-up space.
UCBs can also offer supplementary loans for repairs and additions, with ceilings based on location and proper assessment of construction costs. Lending to housing boards is permitted, provided boards demonstrate sound loan recovery practices. UCBs are cautioned against lending to builders who typically raise funds via customer advances; however, contractors with small-scale, self-financed projects may be considered for finance under strict safeguards.
RBI mandates housing loan disbursals be phased and linked to construction stages, discouraging upfront lump-sum disbursals. For loans under the priority sector, separate master directions apply. Banks must remain vigilant against frauds, such as multiple loans against the same property or forged income documents, and are advised to independently verify borrower credentials.
Banks must also prevent financing of unauthorized constructions and enforce transparency by requiring builders to disclose existing mortgages in promotional material. Finally, adherence to the National Building Code is recommended to ensure structural safety and regulatory compliance in housing projects.
