Real estate: Back to freebies this festive season

Sep 21 2013, 10:23 IST
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Developers have been hit hard by a surprise move from the RBI that in a notification asked banks to restrict lending under 20:80 scheme for under-construction projects. Developers have been hit hard by a surprise move from the RBI that in a notification asked banks to restrict lending under 20:80 scheme for under-construction projects.
SummaryRBI restriction on loans under 20:80 scheme has developers reworking strategy to woo buyers without reducing prices.

The RBI notification restricting loans under 20:80 scheme has developers reworking strategy to woo buyers without reducing prices. Some are coming up with new variants while others are banking on gifts and freebies

The just-concluded Ganesh festival has not shown much movement in Mumbai’s real estate market. This is usually a period when buying activity starts and is a harbinger for the turn the market would take during Dussehra and Diwali, the ‘festive season’ for realty players. But pushed into a corner due to the slowdown, developers are working out new schemes and offers and also handing out gifts and freebies.

A recent report by Jones Lang LaSalle (JLL) India shows that Mumbai city alone has unsold inventory that would take 48 months to clear at current absorption levels, while for Delhi-NCR it is 21 months. For Pune it stretches 14 months.

Given the staggering numbers, developers have also been hit hard by a surprise move from the Reserve Bank of India that in a notification on September 3, asked banks to restrict lending under the 20:80 scheme for under-construction projects. This has led to all calculations going topsy-turvy.

“Under the notification, the central bank has particularly advised banks against upfront disbursal of a significant portion of the loan amount to the developer without linking the same to the stages of construction. RBI has tightened the norms to protect the interests of buyers and contain the fallout of such innovative housing financing schemes. It feels that any default by builders could affect the credit profile of the borrower and expose banks to higher NPAs,” said research note from Crisil.

The Scheme

As per the scheme, a tripartite agreement was signed between the bank, the developer and the home buyer who would book by paying 20 per cent of the total cost. The bank would give almost 80 per cent of the remaining amount to the developer on behalf of the buyer. The developer agreed to pay the interest and some principal amount for a stated period of say 2 years and on possession, the entire amount would be paid back to the developer by the buyer.

“The problem was that the developers were using the credit line of the home buyer and were getting the funds as home loan at much cheaper rate of 10 to 12 per cent interest instead of construction finance which is usually given at 16 to 18 per cent,” said M

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