A scam is brewing on the home loan front. Some borrowers are raising home loans from banks and housing finance companies and using the money for commercial purposes.

Home loans are being procured against fake house deeds -- with agents, builders and customers operating hand in glove -- to divert funds to trade.

"Till now, only a few stray cases have been detected. However, if the numbers rise, it can snowball into a major crisis and deal a body blow to the growing home loan market," said a senior banker. Further, a scam could negatively impact the growth of securitisation of home loans.

The Reserve Bank of India has detected a few cases in Bhopal. In Mumbai too, such cases had come to light, a source close to the RBI said.

In the rush to widen the customer base and enhance their home loan portfolio, some banks and HFCs have been lending without meticulously verifying documents.

Only if the businessman fails to pay the monthly equated installment will the HFC become aware of the malpractice as it tries to recover its dues by selling the flat.

The RBI has been cautioning banks to go slow in the housing finance business, especially with competition on interest rates intensifying.

The scam is looming primarily where banks and HFCs have tied up with builders to offer cheaper loans to customers.

Without the HFC/bank being in the know of things, the lending institution issues a cheque in the name of the builder against a copy of the deed, which is in the process of being registered by the authorities.

The builder then transfers the funds to the businessman, who is seemingly buying a flat in the complex.

On the transfer of the funds, the builder cancels the registration of the flat at the stamp office. Currently, the registration office can't inform the HFC/bank of the changed development.

The lending institute continues to hold a copy of the documents, not realising they are worthless.

The business community is happily taking advantage of the loopholes as it avails of cheap long-term loans at nine to 10 per cent, against what would otherwise have cost it over 13 per cent.

Business loans also need to fulfill a host of formalities and pledge some form of collateral as security. Here, a long-term loan of 15 years or more requires a copy of the house deed, which is being forged or cancelled.

The aggressiveness of banks and HFCs is bound to take a toll on operational issues, said a senior official at housing finance company.

"What's worse is that the scam will affect industry's ability to access cheaper funds through the securitisation route in future," said the official.