How safe are home loan borrowers in bank-HFC co-lending?

[ecis2016.org] We examine what a co-lending model of housing finance, involving banks and HFCs, is and how it impacts home loan borrowers

Home buyers may often find real estate developers helping them with housing finance, through their tie-ups with financial institutions. However, when this home loan is being co-lent by a bank and a housing finance company (HFC) together, several questions may arise in the minds of the home buyers:

You are reading: How safe are home loan borrowers in bank-HFC co-lending?

• Who would be the lending interface – the bank or the HFC?
• Who would I hold liable, if something goes wrong?
• To whom do I pay my EMI?
• Who would keep my property papers?
• Is it safe to get into such an arrangement?

Co-lending model meaning

According to the guidelines issued by the Reserve Bank of India (RBI), a co lending model scheme (CLM) is an arrangement, where two lenders come together to give loans. This is mutually beneficial for banks, which have better access to liquidity, as well HFCs, which have better market penetration.

The co-lending arrangement seems a viable business proposition at the macro level, where both the partners – banks and HFCs – leverage the strengths of the other. It is an arrangement between two lending firms to disburse housing loans, typically, in an 80%-20% ratio.

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Notable CLM arrangements

• HDFC and Indiabulls Housing Finance
• Yes Bank and PNB Housing Finance
• Karur Vysya Bank (KVB) and Cholamandalam Investment and Finance Company
• Bank of Maharashtra and LoanTap Credit

How the RBI co-lending model impacts banks and HFCs

Amit Narain, a banker, points out that the CLM itself is not new; the only difference is that now, non-banking finance companies (NBFCs) have joined hands with banks. Earlier, banks used to co-lend to the developers. Now, it would be interesting to see how the two parties agree on their data-sharing of the clients. After all, each loan borrower is a potential point of reference to many new borrowers. “There is nothing significant from the standpoint of the buyers, to call it a game-changer. Of course, the HFCs process the home loans quicker and are perceived to be more bullish towards client acquisition than banks. However, HFCs are also known to be lenient, vis-à-vis credit reliability of the borrowers. Now that the bank will be a senior partner in the CLM, the HFCs would find it difficult to lend leniently with higher borrowing cost as the trade-off,” explains Narain.

According to Rajan Bala, a finance researcher, now that HFCs have come under the direct supervision of the RBI, a number of banks are entering into such co-lending arrangements with the HFCs. It is a win-win situation for both, the banks and the HFCs and the buyers have nothing to worry about. He, however, agrees that gaining the borrowers’ trust will take time, as the lending partners in India have never taken the onus of due diligence of the project with its loan disbursement. “The RBI notification clearly states that the lenders have to disclose all the details of the co-lending arrangement to customers upfront and take their explicit consent. HFCs will be the single point of interface for the customers. It will enter into a loan agreement with the borrower, which will contain the features of the arrangement and the roles and responsibilities of NBFCs and banks,” says Bala.

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Co-lending by banks and NBFCs: How it affects home buyers

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Co-lending models are still at a nascent stage in India and the fact remains that such arrangements would require significant groundwork from both, the bank and the NBFC, to iron out any point of conflict in future. Although the RBI guidelines mandate them to enter into a tripartite agreement with each borrower, it is to be seen how the agreement incorporates the fourth party, real estate developer, who receives the funds. The monitoring of the funds under the CLM with a separate escrow account also needs to be worked out.

For the buyers who have a high credit score and credit reliability, nothing changes. Other borrowers may find it difficult to get loans and may have to settle for higher interest rates and higher DTI (debt-to-income) ratio. Co-lending is also seen by a section of market watchers as a better model than direct lending by HFCs, because the banks will push for more due diligence and credit check of the borrowers.

Experts suggest that an eligible home loan borrower must ask, in writing, what the RBI guidelines have mentioned. For example, if there is any grievance and the borrower wants redressal, the co-lenders must reveal upfront how the lenders would resolve it within the 30 days of the complaint being registered. The RBI notification also mandates that if the financial institutions do not address borrowers’ grievances, the borrower can escalate the same with the concerned banking ombudsman, or ombudsman for NBFCs, or with the customer education and protection cell of the RBI.

FAQ

(The writer is CEO, Track2Realty)

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