The Reserve Bank of India has sounded the alarm bell on home loans. The possibility of lending institutions facing a home loan bubble burst has prompted the central bank to set up two committees to tackle the problem head-on.

While one committee will look into the modus operandi of frauds and how to tackle them, the other will seek to sensitise overzealous banks, some of whom were extending loans for 100 per cent of the value of the property purchased, on the pitfalls facing them.

Housing and Home Loans: Complete Coverage

The two committees -- one on frauds and the other on loan-to-value ratio (the ratio of the loan given by a bank to the value of the property purchased by borrower) -- were formed at a recent meeting held between the central bank and bankers.

At the meeting, the RBI warned that in their eagerness to push retail loans banks were throwing caution to the winds.

It was impressed upon the banks that though the delinquency rate in home loans was not a cause for concern for the moment, it may not remain so if they resort to short cuts.

The central bank observed that some foreign and private sector banks were extending home loans without the borrower even having to put in any margin money. This led to the loan-to-value ratio being 100 per cent or more.

The home loan offered by these banks even covered furnishings!

It was felt that all banks should insist on the borrower putting in margin money so that he remains committed to the loan.

In sharp contrast, the public sector banks have a loan-to-value ratio of around 80 per cent.

The most common modus operandi adopted by unscrupulous borrowers is to avail of credit facilities by submitting forged/ fake documents in respect of properties offered to banks as securities. In many cases the same property is offered as security to different banks by submitting fake title deeds.

In some cases the properties, which were mortgaged to the banks, were found to be non-existent. Further loans were granted to persons without verifying their antecedents/details. Subsequently, the borrowers were found to be non-existent.

The documents -- title deeds, income tax returns, salary certificates etc -- submitted for availing loans were found to be fake/fictitious.

In some cases co-applicants names were added just to arrive at higher eligible amount for home loans. In certain instances valuation reports submitted were highly inflated.