RBI and Stamp Duty and Registration charges
Just after a budget that allowed inclusion of NBFCs into the SARFAESI fold, giving a shot in the arm for NBFCs that are actively involved in property backed lending, RBI announced another relaxation in the lending norms for Banks.
In 2012, RBI had brought out a policy that prohibited inclusion of Stamp Duty and Registration Charges in the cost of property for financing purposes. Let us look at the following example:
Property Value: Rs. 10,00,000
Stamp Duty: Rs.80,000
Registration Charges: Rs.20,000
The value that would be considered for funding, and on which the Loan to Value (LTV) ratio limit would be applied, would only be Rs.10 lacs as per the norms of RBI. If the LTV ratio was 85%, the maximum funding that can be given would be Rs.8.5 lacs.
On 5th March 2015, RBI announced a relaxation in the funding norms for loans for properties with a value of upto Rs.10 lacs. The relaxed norms allow inclusion of Stamp duty cost and registration charges for lending purposes. As per these norms, in our example, the LTV ratio of 85% can be applied on Rs. 11 lacs (10,00,000+80,000+20,000). The amount funded with 85% LTV would be 9.35 lacs (85% on Rs.11 lacs). This results in an additional funding of Rs.85,000 (Rs.935,000 – Rs.850,000).
For those banks that are active in funding for loans in this property segment, this is going to be a definite benefit as they would be able to attract more customers to take loans from them. However, if we see the ground reality, there are several housing finance companies, that already are including stamp duty and registration charges for financing purposes, notwithstanding the cost of property. So this is not something special that the banks would be doing. In fact they have just been brought at par with these housing finance companies and that too only for loans with properties valued upto Rs.10 lacs. For loans to properties valued more than Rs.10 lacs, the HFCs still have an edge.
This easing of norms through inclusion of stamp duty and registration / document charges is therefore not likely to bring any big change in the lending system. This change will only affect that segment of lending done by banks where property value is Rs.10 lacs or lower. It may be noted that a large chunk of lending done by Banks (more than 90% of lending) is for properties that have values more than Rs.10 lacs.
The new norms, would certainly allow banks’ borrowers in this segment in availing a higher loan amount. However the overall market impact and the size of lending portfolio that this change would affect, would be insignificant.
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Sitaraman is an expert in Risk Management with over 23 years of experience in the lending industry. He has written a thought provoking book, a thriller fiction - The Whistleblowers (Published by Westland Ltd.). The book gives inside insights to a layman on how Risk Management works in a lending organisation and also helps the reader to the right things while putting all his / her savings in buying a property. Click here for more details of the book – The Whistleblowers.