CARE Ratings said that the National Housing Bank's (NHB) direction on interest subvention products is likely to have an impact on the sales velocity of the developers. It added that the loan book growth of the housing finance companies (HFCs) is likely to be affected owing to this dip in sales.

"In the desire to increase loan book, the HFCs would now have to guard against reintroduction of this scheme in any other manner, " CARE Ratings stated.

The credit rating agency said the scheme has been a market practice for years, wherein the developers are funded for a relatively shorter period on the basis of the borrower’s credit record. The scheme aims to increase the sales of residential property, as the developer is able attract home-buyers by offering the subvention on the interest.

"The scheme is a common practice in projects with high priced houses; majorly prevalent in metro and Tier I cities. In such an arrangement however, the borrowers and the lenders are exposed to substantial risk from the developers. In case of a default in payment by the developer, the borrower’s credit record is impinged," the agency said in its BFSI newscast.

NHB's advise to HFCs

NHB has advised HFCs to desist from offering loan products involving servicing of the loan dues by builders/ developers etc on behalf of the borrowers.

"The prevalent products of HFCs, if any, should also be reviewed on the above lines. It is clarified that the above stipulation shall also be effected in cases wherein the HFC is yet to commence disbursements under the sanctioned cases," it said.

NHB elaborated that it continues to receive several complaints in relation to housing loan products involving subvention schemes offered by the builder/ developers. Further, instances of frauds that were allegedly committed by certain builders using subvention schemes have also been brought to the their notice.

It reiterated that the disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses. In cases of projects sponsored by the Government/statutory authorities, HFCs may disburse the loans as per the payment stages prescribed by such authorities. This could be done even where payments sought from house buyers are not linked to the stages of construction, provided such authorities have no past history of non-completion of projects.

NHB said 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.

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, it warned.

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