NHB Amends Refinancing Guidelines To Avoid Misuse of Home Loans

The National Housing Bank (NHB) has strengthened its housing finance company (HFC) refinancing norms to prevent the misuse of home loans. Refinancing will be permitted for home loans only if construction is less than 50 per cent when the first disbursement is made. The step is taken to prevent home loans from being used to raise funds on already completed property and instead spend them on actual housing needs.

Why The Change

In recent years, a trend of increasing number has been where home loans were being availed for buildings that were already almost complete or ready. In those instances, borrowers were actually using home loans as a means to raise funds and not for house building or purchase.

With a view to checking this trend, NHB has now clearly stated that it will finance only those loans in which construction is not more than 50 per cent progressed as of first disbursement. NHB is the primary refinancing institution for housing finance companies in the nation, and its amended guidelines are bound to have a direct bearing on how HFCs organise their lending.

What Does Refinancing Mean

Refinancing in this context is the funds NHB advances to HFCs against the home loans that they advance to consumers. It enables HFCs to control liquidity and lend more efficiently. But if this refinancing is done for housing finance advances which are not geared for housing development purposes, then it can thwart the objective of affordable housing finance.

With the new policy, NHB will now require a technical report to ascertain the stage of construction at the initial disbursement of the loan. This technical verification will ensure that refinancing is only for under-construction properties.

Requests Rejected

Housing finance companies had asked NHB to extend refinancing even to post-construction loans, as per reports. These requests were rejected by the regulator. NHB said that it desires responsible lending and does not favour using home loans to serve as a tool for post-construction funding.

This action is also likely to safeguard the interest of honest homebuyers by ensuring that the flow of credit is kept centred on the housing market, especially towards affordable housing.

What It Means for Borrowers and Lenders

For consumers, this will not make much of a difference unless they are taking loans for properties that are already constructed. However, for HFCs, the regulation means that they have to be more cautious while choosing the loans they wish to refinance with NHB. It also places greater focus on early-stage funding, where money has to be utilised to finish housing projects.

Overall, the decision fits with NHB's objective of facilitating affordable housing and enhancing transparency in housing finance. By tying refinancing to the construction stage, it also ensures that the funds are used for their intended purpose.

This measure is also one of the wider trends among financial regulators to strengthen rules and plug holes that can lead to credit misuse. Even though it will cut down the number of refinancing eligible loans, it is viewed as a step towards greater discipline and more sensible credit habits in the housing finance arena.