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LIC Housing Fraud:FREEZE BUILDER HOME LOANS, by Shivaji Sarkar,3 December 2010 Print E-mail

Economic Highlights

New Delhi, 3 December 2010

LIC Housing Fraud

FREEZE BUILDER HOME LOANS

By Shivaji Sarkar

 

In 1994 the then Housing Minister Sheila Kaul announced the Government’s decision to introduce “mortgage housing scheme” at an award function and raised hope among millions. Nobody knew then that the provisions made for the poor and middle class would be manipulated by some realty corporates in liaison with the public sector LIC and bank officials to siphon off funds for jacking up housing prices.

 

No wonder, the myth of the housing price bubble has been busted albeit a bit too late. Even in its recent report the UN Conference for Trade and Development expressed grave concern over the unaffordable housing prices in India. Whereby, the shortage from 60 million dwelling units now stands at 70 million units.

 

Undoubtedly, the market operated by manipulators has mastered the art of fleecing possible buyers. Since it has no regulator, the builders charge exorbitant “maintenance fee,” in many cases almost equal to that of the monthly loan instalment. It is a pity that the needy have been left, by the authorities, open to fleecing.

 

In this scenario a non-functioning Government only bothered about the so-called growth remains oblivious to the actual problems. What had started as the Harshad Mehta stock scam in 1992 has spread its tentacles to different areas from where public funds could be easily laundered.

 

The LIC Housing Finance (LICHF) scam involving top financial executives of LIC, Bank of India, Central Bank of India and private sector Money Matters Group and 21 other companies has shaken the confidence of not only those seeking housing loans but also of all depositors and insurers, whose money is being laundered without his permission.

 

The CBI plea --- it is not a fraud and “only involved bribery and corruption” --- is simply untenable. Clearly, it is a fraud and breach of trust of the worst kind. It demands exemplary and even death penalty because the officials have murdered the aspirations and hopes of millions. The officials, if the allegations are true, should be made to pay the amount that they have laundered. The companies and their owners and directors also need similar punishment so that nobody ever dares manipulate any public fund.

 

Nobody knows how much has been siphoned. But it must be several thousand crores. This demands reviewing of the RBI monetary policy. It has been repeatedly pointed out that squeezing the money market would add to inflation, raise cost of borrowing and further stoke inflation. In a tight monetary situation those “capable” look for such easy manipulations. It is time the interest rates, including on commercial loans, are brought down.

 

Besides, the RBI has of late been too lax with banks and monetary institutions. It has allowed them to recklessly raise their fees to tide over non-performing assets (NPAs) --- unsecured or lost loans or money lost in fraudulent transactions like the LICHF scam. The moot question: Whether the regulator is working for the depositors or for the not-so-honest banking sector?

 

The RBI has been promoting a strange rule that puts penalty for pre-payment even if it is after ten years. It penalises the common investor but the fraudulent realty firms need not bother as they pass on their burden to unsuspecting prospective buyers.

 

Particularly as the LICHF scam is not easy to decode. Officials conversant with the law and rules have had every opportunity to pose as “innocent victims misled by the realty companies”. It is not that simple. It speaks of a wider nexus.

 

Significantly, politicians help builders get land, and use their clout to convert agricultural and forest lands for development. In most cases, proper documentation is not done and kickbacks to bankers have become common. The developers give high cuts ranging from one to six per cent of the loan sanctioned, particularly in the RBI-ordained tight liquidity regime. The developers are also said to gift their ‘accomplices’ apartments and other benefits.

 

The LIC is stated to have bailed out a number of realty companies’ IPOs (initial public (equity) offers). Many of them apparently got loans from LIC, which had also been buying realty stocks in the secondary market. Needless to say, the nexus must be wider and not limited to LICHF. The probe has to spread to other wings of the PSU, including LIC Mutual Fund and mutual fund operations of different PSU banks.

 

Importantly, this scam is much more than simple gratification. A few masterminds in the public and private sectors have been successful in almost creating parallel finance units to jack up company profiles, prices at the stock exchange and deprive the common buyer of an opportunity to get easy housing loans. Whereby, it was an “impeccable” system operated through middle men like Money Matters. This company used to help get the builders and less credit-worthy borrowers’ loans through payments under the table and also roll over old loans on easier terms. This helped the realty firms hold on to high prices even if the property remained unsold.

 

The realty firms would borrow from banks against the money they would receive from buyers as an when flats were sold. This is called future receivables. They also took construction loans, often shown as funded through benami loans from organisations like LICHF.

 

Pertinently, banks and housing finance companies are not authorised to fund acquisition of land. Many a times, the borrowings shown as construction loans were in fact channelled to buy lands. This was one of the reasons for the rising land prices. In reality, the public sector banks and FIs were busy fuelling an anti-people measure.

 

There is no gainsaying that the recent steps would lead to a thaw in sanctioning of housing loans. The RBI should consider suggesting at least a one-year moratorium on loans for buying houses from builders. The loans should be extended only to genuine housing cooperatives of individuals, Government housing boards and similar official organisations and individuals. The moratorium would ensure that the builders face heat as banks recall dubious loans. It would also put on hold realty IPOs.

 

True, some projects might get delayed. This is welcome if the system has to be cleaned to help actual buyers’ posses what is being built for them. Many housing projects built on such dubious funds in Delhi & NCR have become speculators paradise even though the real buyers do not buy properties situated at odd areas. The Government also needs to have an open discussion on the problems and pitfalls in the housing loan area. The LICHF is merely a symptom of a disease. It needs proper treatment and if required, even surgery. ---- INFA

 

(Copyright, India News and Feature Alliance)

 

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