Last week, the National Housing Board advised housing finance companies (HFCs) to refrain from giving loans for under-construction projects which are under any subvention scheme, in view of various complaints of fraud. Such schemes, launched along with HFCs, offered to pay EMIs on behalf of buyers till possession or to make part payment and so on, but all of these benefits were wrapped in fine print. Since the existing schemes have not been scrapped, buyers still need to be careful before signing up. Ashwini Kumar Sharma asks experts how the NHB move will affect buyers and the real estate market.
Circular to have little impact as share of loans in HFCs is low
—Ramesh Nair, chief executive officer and country head, JLL India
The National Housing Bank (NHB) has advised housing finance companies (HFCs) to desist from giving upfront loans under subvention schemes offered by builders to sell homes. It has advised that the disbursal of loan be linked to the stages of construction. The Reserve Bank of India (RBI) had issued similar advice to scheduled commercial banks in 2013.
According to estimates, the share of such loans in HFCs is in single digit. As a result, I believe that there will be a modest impact on the market. Moreover, for the last couple of years, homebuyers are preferring projects that are in advanced stages of construction, where such upfront loans are not required under subvention schemes.
NHB’s step is laudable, but the circular’s impact will depend on whether or not the regulator exercises its powers in this regard in the coming days. As per the recent budget announcement, the regulation of HFCs may shift to RBI and that will mean HFCs are in wait-and-watch mode.
This will lead to further drying up of funds for realty projects
—Niranjan Hiranandani, president, NAREDCO
In a move that will impact financing to projects as liquidity crunch is being acutely felt, NHB has advised HFCs to stop funding schemes in which developers offer to service interest on housing loans on behalf of the borrowers. NHB cited prevalence of fraud in such subvention schemes as the reason. with regard to the fact that through this NHB seeks to control frauds, it is obviously a welcome move, but the side-effect will be further drying up of funds for projects. It will also impact homebuyers who don’t want to or are unable to bear the burden of paying both EMI and rent, during the construction of the house they have booked.
The industry is desperate for support from the government in terms of a solution to the liquidity crunch which is leading to bankruptcy for some developers. While fraud in such schemes definitely needs to be controlled, the need for alternate funding options is what resulted in subvention schemes being aggressively positioned.
Transaction volumes likely to come down in metro cities
—Gulam Zia, executive director, valuation and advisory, retail and hospitality, Knight Frank India
Subvention schemes were offered by reputed and A-grade developers on whom financial lenders had enough confidence. In fact, about 10-12% of the total home loan market in the top eight cities were subvention schemes earlier.
HFCs and non-banking financial companies (NBFCs) were earlier offering it. However, banks were not allowed to do so, as per RBI regulations.
Now RBI, which is set to become the new regulator for HFCs and NBFCs (Finance Bill, 2019 brings NHB under RBI), seems to have cracked the whip to make it a level-playing field for all. Such schemes were used by developers to sell under-construction properties. In the absence of subvention schemes, the transaction volumes are likely to come down in metro cities. In recent times, the subvention schemes were extended to even ready-to-move properties, wherever unsold real estate inventory was piling up. The new ruling will make a dent on this side of market as well.
Total ban on the subvention schemes will stress market
—Samir Jasuja, founder and chief executive officer, PropEquity
NHB’s directive to HFCs to stop giving loans under subvention schemes will impact the cash flows of the homebuyers who will have to bear the burden of equated monthly instalments (EMIs) and monthly rent at the same time.
Developers will be adversely affected as over 50% of the sales over the last three years were driven by subvention schemes. This directive is with the intention of enhancing focus on project execution that has plagued the industry for some time now.
In the long term, this is likely to be a good initiative as HFCs have also been instructed to adopt a well-defined process to monitor the progress of construction. However, it is coming at a time when the sector has been experiencing slow sales.
Hence, a total ban on subvention schemes can lead to stressing the market further these offer rewarding advantages to customers since the financial risk of construction delay lies wholly on the real estate developer.