Parekh slams builders’ 10% booking schemes

HDFC Chief Says Lenders Shouldn't Fund Unless All Approvals Are In Place

HDFC chairman Deepak Parekh has strongly criticised schemes, whereby builders offer to book apartments at 10% of the property value with balance to be paid on completion.
    "Within days of buying a plot, builders are putting out advertisements accepting booking at 10% upfront payment," said Mr Parekh. He questioned how it was possible for developers to receive all approvals overnight and said the regulator should not allow lenders to fund projects unless all approvals have been received.
    Mr Parekh's statements were in support of RBI's move to ensure that banks lend only after potential home buyers bring in 20% of the property value. Although most banks insist that borrowers bring in at least 15% of the property value, some banks in their eagerness to get large accounts have funded borrowers after they brought in the initial 5-10% of the property value, with the understanding that they will bring their remaining portion of the finance at a later day.
    In the months leading to the financial crisis, some private banks had come out with schemes where they offered 100% financing of the property. Some of the banks had burnt their fingers as a result of such loans since borrowers had no equity in the property. Earlier, before the financial crisis, RBI, in order to discourage such lending, had said banks needed to provide higher capital for loans where the borrower's equity was less than 25%. However, banks discovered a loophole after they found out that the excess capital has to be provided only as long as the outstanding loan is more than 75% of the property value. Now, with the strong revival in housing demand, banks were again getting enthusiastic in growing their mortgage portfolio. To curb this practice, the central bank said banks, henceforth, cannot lend more than 80% of the property value.
    Mr Parekh said in the rush for market share, lenders should not set aside prudential lending norms. RBI has also discouraged banks from lending for purchase of properties over . 75 lakh by asking banks to set aside more capital for such loans.
    Bankers, however, say the Indian mortgage market is a far cry from the US. Unlike the US, there is a huge housing shortage in India. Also, income levels are rising at a much faster rate. They point out that in India, on an average, home loans are repaid in seven years and the loan to property value ratio is less than 75%.