“Own a home now, pay later” is an innovative finance scheme running by realty developers across the country. This scheme is known as interest rate subvention schemes. The prime goal of this financial scheme is to attract more home buyers by offering payment flexibility for their real estate projects. This scheme was utilised by the real estate developers and banks to boost sales of apartments.
The National Housing Bank (NHB) has recently issued a new directive asking the housing finance companies to stop all the subvention schemes offered by the builders for under construction projects.
"Several complaints continue to be received by the National Housing Bank in relation to the aforementioned housing loan products. Further, instances of fraud having been allegedly committed by certain builders using subvention schemes have also been brought to the notice of the NHB," the circular said.
The NHB, in a circular on subvention schemes offered by builders, advises lenders to avoid upfront disbursal of funds for incomplete projects and instead link the payments to different stages of construction.
"In case of projects sponsored by the government/statutory authorities, HFCs may disburse loans as per the payment stages prescribed by authorities, even where payments sought from house buyers are not linked to the stages of construction, provided such authorities have no past history of non-completion of projects," the NHB circular noted.
The NHB has also asked housing finance companies (HFCs) to follow a well-defined mechanism for monitoring the progress of construction of housing projects and obtain the consent of borrowers prior to the release of payments to developers. If a borrower's permission is received and funds are released by an HFC, without linkage to the stage of construction, it will be viewed by the NHB as "dereliction of duty".
How interest subvention scheme works
There are three parties involved in the subvention scheme - a home buyer, lender and developer. The homebuyer books the property by paying a sum of 5-20 per cent of the cost of the property upfront. The lender funds the rest to the developer as the construction progresses but in the form of loan to the buyer. The developer takes care of pre-equated monthly instalments (EMIs) until the buyer took possession or for a specified duration of time mentioned in the buyer-seller agreement. The lender generally disburses the loan amount after deducting EMIs.
Benefits of the subvention scheme
An interest subvention scheme is a win-win for - buyers, real estate developer and banks.
Real estate developers only pay the interest amount or the pre-EMI on the home buyer’s behalf.
Processing the loan for such schemes takes much less time.
Banks attract a large number of customer base with such schemes.
These schemes are affordable for buyers, as neither do they have to bear the burden of paying both loan equated monthly instalments (EMIs) along with house rent.
Impact on the real estate sector
These schemes have been quite successful in driving sales in the sector. According to industry experts, such schemes are being utilised by around half of new housing projects launched in India, which currently account for 40 per cent of all housing real estate sales. The NHB directive is most likely to put a significant impact on home buyers who would buy in such schemes. Now, buyers will no longer be able to avail the flexible payment option that these schemes offer. Thus, in the absence of the subvention scheme, the transaction volumes may come down in metropolitan cities.
Also, this puts an undesirable pressure on many A-lister builders and real estate firms who have a proven track record in timely delivery of projects and also enjoy the confidence of lenders but facing fund crunch due to the slowdown in the sector.
It is worth mentioning that the new directive from NHB comes after several complaints of frauds allegedly committed by certain developers exploiting the subvention schemes and exposing HFCs as well as their individual borrowers to additional financial risks. There were no integral mechanisms in this scheme to protect the home buyer. They had no alternative when project development stalled or if the developer stopped making EMI payments. Therefore, the new directive will introduce more transparency in subvention schemes.
By linking loan disbursements to project development, the new directive will be able to manage this issue to a certain extent. It will make builders more accountable and transparent towards the progress of the construction of their project and ensure that the financial risk for home buyers is reduced.