UNDERSTANDING HOUSE FINANCE/HOME LOAN

A home loan is an amount of money that an individual borrows from a Bank or any other lender at a certain rate of interest to be paid with the EMI (Equated Monthly Installment) every month. The home loan is taken for the construction/renovation of residential buildings and the purchase of flats/houses for residential purposes only. The property is taken as a security by the lender against the Home Loan. The property can either be residential or commercial cum residential in nature.

When the borrower cannot pay the EMIs, the lender will possess all the legal rights to recover the outstanding amount of the loan by selling the property in question.

Types of Home Loans in Bangladesh:

Banks/FIs in Bangladesh provide different types of housing finance options for different purposes. Here’s a list of the prominent types of housing loans in Bangladesh, based on a study of products offered by some of the top Banks/FIs:

• Home/Flat Purchase Loans:?Home purchase loans are specifically given to borrowers looking to purchase a house or flat.
• Home Loan for Construction:?A home loan for construction is offered to customers looking to construct their own house for residential purposes.
• Home Loan Top Up:?Home Loan Top Up is a facility offered by Banks/FIs that permits existing clients to borrow a convinced amount beyond the existing home loan.
• Home Extension/Renovation Loans:?Home loans for the extension or renovation of homes are offered to borrowers who wish to renovate/extend their existing house/flat.
• Balance Transfer Home Loan:?Individuals can use the balance transfer option to transfer their home loan from one Bank/FI to another. Most people choose this option to avail lower interest rates and increased loan amounts than the previous lender.

BANGLADESH BANK REGULATIONS FOR HOUSE FINANCE

In 2004, Bangladesh Bank published a guideline (prudential regulations) for consumer financing. There are seven regulations (Regulations 23 to 29) for House Finance. Over time, some modifications and inclusions have taken place, described below with specific circular references and dates. ?

These guidelines are for scheduled Banks only.

REGULATION – 23

• The maximum per-party limit in respect of housing finance by the Banks will be Tk 7.5 million.

(Prudential Regulations for Consumer Finance- First Edition-2004)

• The maximum per-party limit in respect of housing finance by the Banks will be Tk 10.00 million.
• The housing finance facility shall be provided at a maximum debt-equity ratio of 80:20

(BRPD Circular # 23, Dated- January 16, 2010)

• Per-party Maximum Limit will be Tk 12.00 Million
• The housing finance facility shall be provided at a maximum debt-equity ratio of 70:30

?(BRPD Circular # 01, Dated- January 01, 2015)

• The housing finance facility shall be provided to NRBs at a maximum debt-equity ratio of 50:50
• The equity portion shall be provided by the borrower-NRBs either through their inward remittances or through debits to their non-resident Bank accounts fed by foreign sources.

?(FE Circular # 19, Dated- December 06, 2015)

• For NRBs working abroad: The maximum debt-equity ratio will be 75:25

(FE Circular # 28, Date: July 23, 2017)

• The maximum per-party limit in respect of housing finance by the Banks will be Tk.20 (Twenty) million. The housing finance facility shall be provided at a maximum debt-equity ratio of 70:30

(BRPD Circular # 25, Dated- November 19, 2019)

REGULATION - 24

• Commercial Banks shall ensure that at no time their total exposure under house financing exceeds 10% of their net consumer advances.

(Prudential Regulations for Consumer Finance- First Edition-2004)

• Housing Finance for real estate businesses and commercial complexes such as supermarkets and shopping malls etc. shall be excluded from the consumer finance category. Loan exposure under the housing finance category should not exceed 10% of the Bank's total loan portfolio.
• The instructions mentioned in the above guidelines are minimum requirements. Banks may include additional requirements in their guidelines to mitigate their risk exposure to any individual borrower.

(BRPD Circular#10, Dated- August 20, 2005)

REGULATION – 25

• Banks are free to extend mortgage loans for housing, for a period not exceeding twenty years. Banks should be mindful of adequate asset-liability matching.

(Prudential Regulations for Consumer Finance- First Edition-2004)

• Banks are free to extend mortgage loans for housing, for a period not exceeding 25 (twenty-five) years. Banks should be mindful of adequate asset-liability matching.

(BRPD Circular#23, Dated- January 16, 2010)

REGULATION – 26

• The house financed by the Banks shall be mortgaged in the Bank's favor by way of registered mortgage with registered Power of Attorney.

(Prudential Regulations for Consumer Finance- First Edition-2004)

• (Due to amendment in the Transfer of Property Act, 1882 (Act No. IV of 1882) it has been decided to make the following changes in Regulation 26 under the caption of Regulation for House Finance of the said Guidelines.)
• The house financed by the Banks shall be mortgaged in the Bank's favor by way of equitable mortgage or registered mortgage with registered Power of Attorney.

(BRPD Circular#04, Dated- March 27, 2007)

REGULATION – 27

• Banks shall either engage professional staff or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc.

(Prudential Regulations for Consumer Finance- First Edition-2004)

REGULATION – 28

• The Bank's management should put in place a mechanism to monitor conditions in the real estate market (or other product markets) to ensure that its policies are aligned with current market conditions.

(Prudential Regulations for Consumer Finance- First Edition-2004)

REGULATION – 29

• Banks must develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Banks also must develop an in-house system to stress test their housing portfolio against adverse movements in interest rates as also maturity mismatches.

(Prudential Regulations for Consumer Finance- First Edition-2004)

Quoted on pages 8–11 of "Banking of Tomorrow"

Md. Abdul Kader

Author, Banking of Tomorrow