The banking regulator said interest subvention schemes were basically classified as mortgage and not construction finance. They were risky businesses and required higher provisioning.

The slowdown-hit realty players had found a sweet spot in the 80:20 scheme for home buyers. But the Reserve Bank of India’s move to bar banks from giving upfront loans for under-construction projects through such schemes may have disastrous consequences, developers say.

What is the scheme?

The 80: 20 or interest subvention schemes are a form of financing home loans and have been part of residential real estate segment in the last few years. Under such schemes, the interest/EMI on the housing loan availed of by the individual borrower is serviced by the builder during the construction period.

RBI, in its recent notification, came down heavily on such schemes, stating that the interest subvention schemes were basically classified as mortgage and not construction finance. The banking regulator said such loans were risky businesses and required higher provisioning. The builder, too, gains as home loans are far cheaper than construction loans.

The 80: 20 scheme has been the highest in the Rs 45 lakh to Rs 1 crore residential real estate bracket or mid-tier segment.

Anshuman Magazine, CMD, CBRE, South Asia, said, “The RBI’s decision to disallow banks from granting loans for under-construction projects through innovative schemes will adversely affect the sale of projects.”

“The RBI has reacted sharply to the fact that a number of banks and housing finance companies are promoting home loan products such as the 80:20 or 75:25 schemes, which involve tripartite agreements involving lenders, developers and property buyers. This move is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes,” Shobhit Agarwal, MD, Capital Markets, Jones Lang LaSalle India, said.

Several small and big players had launched the scheme.

Banking sources told Business Line that at least 10 leading banks were offering the interest subvention scheme. The RBI has also asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers.

Several realty players said they had witnessed a rise in sales after introducing the scheme. Pradeep Jain, Chairman, Parsvnath Group, said his company had witnessed a good response but claimed their scheme was different.

Developers said that the move will put brakes on future growth of the sector.

Navin Raheja, President, National Real Estate Development Council, said, “Normally, these schemes are offered by builders on projects under construction or about to complete. This decision will add more problems to the real estate sector, which is already struggling in the current scenario.”

R K Arora, CMD, Supertech, said, “The decision is counter-productive and has come at a time when home interest rates and increased property prices are high due to rising cost of raw materials.”

(This article was published on September 4, 2013)
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