As per RBI, such products are likely to expose the banks as well as borrowers to additional risks.
On 3 September, Reserve Bank of India (RBI) expressed its displeasure on home loan products such as the 80:20 or 75:25 schemes that make upfront payment to builders. Such schemes are meant to attract buyers in an otherwise lukewarm realty market. Under such schemes, buyers need to pay 20% of the full value of the house upfront after which they don’t need to pay equated monthly instalments (EMIs) for two years. However, some banks were found paying the remaining 80% in lump sum to the builders upfront at the initial stage of construction. RBI has advised banks to closely link home loan disbursal with the stages of construction of a housing project.
According to RBI, these schemes can be risky for banks as well as homebuyers since developers are under high financial pressure. Samantak Das, chief economist and director (research), Knight Frank India, a real estate consultancy firm, said, “When schemes like these come into the market, it is a reflection of fund crunch. Currently, fundamentals and pricing are not correct and these freebies (EMI-free period) will give limited cushion to the developers (in terms of demand spurt)."
Risk for homebuyers: There is the risk of delayed projects. “Delays will affect buyers financially and emotionally," said Amit Kukreja, a Gurgaon-based financial planner. A two-year EMI-free period sounds attractive, but what if the developer delays the EMIs it is supposed to pay on your behalf? Credit information bureaus will not hold the developer responsible, which means your credit score will suffer.
Risk for banks: Banks run the risk of diversion of funds since developers are in a financial crunch. Said Kukreja, “Delay in construction or default on payments can cause disputes between the borrower and the builder." In other words, the bank’s money could get locked in dispute.
The way forward
Says Shobhit Agarwal, managing director (capital markets), Jones Lang LaSalle India, “Banks can continue lending but now they will have to monitor the construction. So in a way it will stop the bubble which could have been created."
Builders have a different take, however. Manju Yagnik, vice-chairperson, Nahar Group, a Mumbai-based developer, said, “Stopping the scheme is not the solution as there are issues such as liquidity crunch and rise in raw material prices. So I believe actual homebuyers will suffer." Nahar Group has a tie-up with HDFC Ltd for an 80:20 scheme.
What if you are still interested? Surya Bhatia, a Delhi-based financial planner, said, “Considering it’s not the builders’ market anymore, you should ask questions about where your money is being invested." Weigh all the pros and cons before investing.