The NHB followed up, advising HFCs not to disburse loans sanctioned to individuals upfront for greenfield projects and to link the disbursals to the various stages of construction.
It is somewhat late in the day but the National Housing Bank (NHB) has done the right thing in asking housing finance companies (HFCs) to desist from making upfront disbursals to builders, saying loans should be be strictly linked to the stages of construction. The fact is that developers have been taking advantage of the subvention scheme to raise funds at a cheaper rate; since the loans are given to home buyers,who have a stronger credit profile, the interest rate is lower at 8-9%, way lower than the 13-14% builders would otherwise have paid. Many of the builders diverted these funds away from the project for which the home-buyers had taken the loans and used the money for other purposes such as buying land.
The NHB is understood to have uncovered cases of fraud where the funds were misused. The former RBI governor D Subbarao had, as far back as September 2013, issued a circular advising banks to desist from disbursing sanctioned home loans up-front to builders. The NHB followed up, advising HFCs not to disburse loans sanctioned to individuals upfront for greenfield projects and to link the disbursals to the various stages of construction. Had it monitored the use of funds, the situation would not have deteriorated to this level. The 80:20 or 75:25 schemes, offered in the pre-launch stage of projects, allowed the buyer to pay 20% of the purchase price upfront. The loans were serviced by the builders on behalf of the home-buyers till the homes were handed over. The problem was that the lenders were disbursing the loans to the builder even though the beneficiaries were the home-buyers.
To be sure, builders will be miffed because their access to low-cost funds will be cut off, but it is important that home-buyers’ money remains safe. After all, if the builder defaults or is unable to complete the project because the funds have been diverted, home-buyers will suffer. Given builders are already unable to access organised funding because banks are turning risk averse, as are mutual funds, this will add to their liquidity problems. Industry estimates put the unsold residential inventory at 1.23 billion square feet and believe it could take close to three years to sell this, going by the current rate at which purchases are taking place. It is no surprise there are few new launches. The slowdown in real estate will be exacerbated by this development, but it is better to be safe than sorry. The NHB’s clamp-down is well-intentioned, but the government needs to ensure that builders don’t go bust and projects are not left incomplete; else whatever money home-buyers have put in will be sunk.