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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.

Ganeshan, a buyer who has booked a flat in a township on the outskirts of Mumbai.

This is similar to the 10/90 scheme, launched in 2009-10 by some developers and banned subsequently. This was an advance disbursement facility scheme wherein 100 per cent money was disbursed irrespective of the progress of the project. These had created many problems and a speculative trend back then.

Over the period, several developers diverted funds and delayed projects for which the loans were disbursed. Banks were in trouble recovering the dues as committed in the agreement. The buyers, on the other hand, were forced to repay after the particular period even without getting possession as per the complicated clauses of the agreement. When they resisted, legal issues cropped up. Projects were fast becoming non-performing assets.

“It was alleged that in the competitive environment, banks went overboard and disguised construction finance as mortgage loans to make their balance sheets look brighter. They looked the other way when the buyer was being grilled on the clauses of the agreement by the developer till the banks began to feel the brunt of it themselves. In some cases, they disbursed almost entire 80 per cent upfront so that they could start levying interest immediately,” said ND Mehta, a property consultant.

An industry source said that developers, who used this scheme then and now, are not small players who would have financing problems. These are big players with good holding capacities who exploited the banks and the buyers and made money and credited the consequences to both. This lot would be the most affected if the supply of cheaper funds suddenly stops.

Issues unresolved

There are some issues that are as yet unclear. One, the notification — as of now — applies to banks and not to housing finance companies. When contacted, a spokesperson for the National Housing Bank, which regulates housing finance companies, told The Indian Express that no such notification on the 20:80 scheme has been issued to these institutions.

Secondly, RBI wrote to various segments of banking sector such as urban cooperative banks and regional rural banks about this order over several days. During this interregnum, many banks and developers have managed to complete the deals under the scheme, industry sources said on condition of anonymity. Since it is not retrospective, they would be spared as well. The notification is assumed to be for the new deals.

If banking sources are to be

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