Skim off realty: No more 20:80 or 25:75 schemes

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SummaryDiscouraging innovative schemes, RBI has asked banks to link home loan disbursals to stages of construction.

Banks can no longer give loans on real estate schemes termed as 20:80 or 25:75 in which the builder, and not the buyer, pays the interest on the loan for a specified period. The Reserve Bank of India (RBI) has tightened the norms for disbursal of home loans and has asked banks to link disbursals to stages of construction 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.

The central bank has underlined that some banks have introduced innovative housing loan schemes in association with developers/builders like up-front disbursal of housing loans to builders without linking the disbursals to various stages of construction of projects. In such schemes, the interest or the equated monthly installment (EMI) on the loan availed of by the individual is serviced by the builders during the construction period or a specified period agreed by the three — the bank, the builder and the buyer, and involves signing of tripartite agreements.

In this scheme, the buyer pays around 20% of the up-front cost and the bank disburses the entire loan to the builder through the individual. The builder finances the construction with the money, and agrees to pay interest on behalf of the borrower to the bank, and the borrower only pays the part of the principal repayment to the bank. After the buyer gets the possession of the house or after the completion of the agreed period of the scheme, the buyer pays the interest and the principal repayment. These schemes are for a fixed period, which means if the developer delays the project, it is the buyer and not the developer, who will bear the interest cost after the agreed period, irrespective of whether the builder delays in giving possession.

Some of the biggest banks like ICICI Bank and Axis Bank and mortgage lender HDFC have tied up with builders to offer the 20:80 scheme to stoke demand because of the slowdown. The increasing popularity of such schemes, especially in the metros, has prompted the RBI to sound out banks against indiscriminate lending under these schemes. Typically, under the scheme, the builder gets funds up-front at a cheaper interest rate of around 10-11%. On the other hand, construction finance for realty projects carries an interest rate of about 18% as it involves higher risk.

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The 20:80 scheme is applicable when the agreement value of the flat, which includes service tax and value added tax is up to R75 lakh. In case the agreement value exceeds R75 lakh, the scheme becomes 25:75 because as per RBI guidelines, banks can lend only up to 75% of the total property cost and the buyer will have to pay the balance amount.

The central bank has underlined that banks must ensure that the buyer is made aware of all the risks and liabilities undertaken under such a scheme. “Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks eg in case of disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc. Further, any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis,” says the RBI notification.

The RBI has advised banks that disbursal of housing loans to individuals should be linked to the stages of construction of the project or the house and up-front disbursal should not be made in cases of incomplete/under-construction/green field housing projects.

A Crisil research note, however, says the move is unlikely to have any major impact on developers as very few of them are being given up-front disbursements under these schemes. “Our coverage reveals that amongst the top 10 cities, 20:80 and similar schemes are mainly prevalent in Mumbai and National Capital Region. However, even in these cities, the proportion of projects offered under the 20:80 schemes is 15-20% and those which offer up-front disbursement of funds to developers is much lower,” says the note.

However, analysts feel the notification on the 20:80 scheme will impact developers’ cashflows. Gulam Zia, executive director, Advisory, Retail & Hospitality of Knight Frank India, says, “Already worsening liquidity position due to reducing sales will be further deteriorated with the stoppage of the 20-80 scheme. This for sure will have an adverse impact on developers, those with deeper pockets can sustain, but the rest will have to either sell their core assets to bigger developers or reduce the price expectations from home buyers.”

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