Jolt to housing projects; housing finance cos to stay away from subvention schemes

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July 23, 2019 7:00 AM

In a circular dated July 19, NHB asked the housing finance companies (HFCs) to stop funding such ‘subvention schemes’, including in cases where the loans have been sanctioned but disbursements are yet to commence.

The NHB fiat comes close on the heels of the Budget decision to strip it of the role of regulator of HFCs — it will continue to be refinancier of these firms.

Several ongoing and soon-to-be-launched housing projects in metros and other major cities could take a hit as a National Housing Bank (NHB) directive has circumscribed the developers’ ability to raise low-cost funds for construction under the schemes where they service the loans taken by homebuyers to make down payments, till the projects are completed.

In a circular dated July 19, NHB asked the housing finance companies (HFCs) to stop funding such ‘subvention schemes’, including in cases where the loans have been sanctioned but disbursements are yet to commence.

The NHB move follows reports of widespread fraud in such schemes, but many developers who use the funds strictly for the projects concerned could also be impacted, analysts said. Analysts say as far as the homebuyer is concerned, the regulation could cut both ways. On the one hand, developers may choose to offer a discount in order to push sales and on the other, it could affect their ability to repay.


The NHB fiat comes close on the heels of the Budget decision to strip it of the role of regulator of HFCs — it will continue to be refinancier of these firms. RBI may soon issue a similar directive to banks as there are instances of such subvention schemes run by the banks. In 2013, RBI had told banks to link loan disbursements in what were known as “80:20” and “75:25” schemes to stages of construction.

Though well-intentioned, the NHB directive could in many cases have the unintended consequence of taking the wind out of the real estate projects’ sail, when the developers and liquidity-starved HFCs are in the throes of ending a prolonged slump in the real estate sector that have hurt all stakeholders, including the home-buyers.

ANAROCK Property Consultants chairman Anuj Puri said: “Albeit indirectly, this will definitely put even more strain on many developers’ already precarious liquidity situation.”

The NHB move will also discourage buyers who were largely attracted to a project due to subvention schemes offered by builders. “This move however also reflects the increasing focus on project execution, as HFCs have been directed to have a well-defined mechanism to monitor the progress of the construction of a concerned housing project. This is definitely sound reasoning – in these troubled times of stalled and heavily delayed projects, construction progress has become the ‘Holy Grail’,” he said.

Industry executives say this kind of financing structure has typically been used to enable developers to obtain access to up-front funding for construction rather than offer any real benefit to home-buyers. Repco Home Finance’s former MD and CEO R Varadarajan said: “(Under these schemes) the entire housing loan would be released to the builder, who pays the interest on behalf of the homebuyer every month. The release of the loan would not correspond to the stages of construction. Also, the builder gets the benefit of lower retail interest rates rather than actually taking out a project loan, where they would have to pay more interest.”

Magma Housing Finance CEO Manish Jaiswal, however, said the circular is a step in the right direction. “Perhaps the genesis of this direction from the regulator stems from builders pricing in ‘subvention costs’ in retail pricing with the promise of a flat handover by a certain date. Most builders overran their hand-over promise dates to consumers either due to execution delays or tight liquidity or both,” Jaiswal said. He added that in many cases, builders refused to compensate the consumer for the delay in hand-over. Consequently, the financial obligations of interest and the EMI burden fell squarely on the home-buyer in such cases.

In a note to clients, SBI Cap Securities said the new norms could lead to a drop in home sales and, by extension, a substantial slowdown in disbursements. The introduction of a stage-wise consent clause is likely to raise the cost of operations for HFCs. “Developers with funding/liquidity constraints [will] face further tightening of credit, higher cost of funding…They may need to necessarily offer higher upfront discounts in order to accelerate sales in this environment,” the broking firm observed.

Last month, DHFL defaulted on repayment, which led to a slew of rating downgrades and worsened fears of a spill-over contagion effect. However, stiffer rules on the capital requirements of HFCs, notified by the NHB, will most likely be retained by the RBI, say analysts.
In addition, the NHB circular reiterated a 2016 directive in which it had advised HFCs that disbursement of housing loans should be strictly linked to the stages of construction and no upfront disbursement should be made in case of incomplete or un-constructed projects.

The only exception to this will be projects sponsored by government or statutory authorities, wherein HFCs may disburse the loans as per the payment stages prescribed by such authorities. They will be allowed to do so even in cases where payments sought from homebuyers are not linked to the stages of construction, provided such authorities have no past history of non-completion of projects.

“HFCs should have in place a well-defined mechanism for effective monitoring of the progress of construction of housing projects and obtaining consent of the borrower(s) prior to release of payments to the builder/developer,” NHB said in its latest circular, adding,

“Merely obtaining borrower consent and release of funds by the company without linkage to the stage of construction will be seen as dereliction of duty of the HFC.” This is not the first instance of a regulatory intervention on the use of interest subvention by builders in the home loan segment. Of “80:20” and “75:25” schemes, the RBI had said in 2013, “Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks e.g. 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 on behalf of individual borrowers to banks could lead to lower credit rating of such borrowers by credit information companies and result in greater risk of diversion of funds, RBI had noted.

As per the NHB’s recent directives, HFCs will have to raise their capital adequacy to 15% of their risk-weighted assets by March 2022 from 12% now. It has also directed the HFCs to trim their borrowing limit to 12 times of their net-owned funds (NOF) in a phased manner by March 2022 from 16 times now. The public deposits being taken by eligible HFCs are also capped at three times of their NOF.

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