The RBI Notification Restricting Loans Under 20:80 Scheme Has Developers Reworking Strategy To Woo Buyers Without Reducing Prices. Some Are Coming Up With New Variants While Others Are Banking On Gifts And Freebies
The Just-concluded Ganesh Festival Has Not Shown Much Movement In Mumbai’s Real Estate Market. This Is Usually A Period When Buying Activity Starts And Is A Harbinger For The Turn The Market Would Take During Dussehra And Diwali, The ‘festive Season’ For Realty Players. But Pushed Into A Corner Due To The Slowdown, Developers Are Working Out New Schemes And Offers And Also Handing Out Gifts And Freebies.
A Recent Report By Jones Lang Lasalle (Jll) India Shows That Mumbai City Alone Has Unsold Inventory That Would Take 48 Months To Clear At Current Absorption Levels, While For Delhi-ncr It Is 21 Months. For Pune It Stretches 14 Months.
Given The Staggering Numbers, Developers Have Also Been Hit Hard By A Surprise Move From The Reserve Bank Of India That In A Notification On September 3, Asked Banks To Restrict Lending Under The 20:80 Scheme For Under-construction Projects. This Has Led To All Calculations Going Topsy-turvy.
“under The Notification, The Central Bank Has Particularly Advised Banks Against Upfront Disbursal Of A Significant Portion Of The Loan Amount To The Developer Without Linking The Same To The Stages Of Construction. Rbi Has Tightened The Norms To Protect The Interests Of Buyers And Contain The Fallout Of Such Innovative Housing Financing Schemes. It Feels That Any Default By Builders Could Affect The Credit Profile Of The Borrower And Expose Banks To Higher Npas,” Said Research Note From Crisil.
The Scheme
As Per The Scheme, A Tripartite Agreement Was Signed Between The Bank, The Developer And The Home Buyer Who Would Book By Paying 20 Per Cent Of The Total Cost. The Bank Would Give Almost 80 Per Cent Of The Remaining Amount To The Developer On Behalf Of The Buyer. The Developer Agreed To Pay The Interest And Some Principal Amount For A Stated Period Of Say 2 Years And On Possession, The Entire Amount Would Be Paid Back To The Developer By The Buyer.
“The problem was that the developers were using the credit line of the home buyer and were getting the funds as home loan at much cheaper rate of 10 to 12 per cent interest instead of construction finance which is usually given at 16 to 18 per cent,” said M Ganeshan, a buyer who has booked a flat in a township on the outskirts of Mumbai.
This is similar to the 10/90 scheme, launched in 2009-10 by some developers and banned subsequently. This was an advance disbursement facility scheme wherein 100 per cent money was disbursed irrespective of the progress of the project. These had created many problems and a speculative trend back then.
Over the period, several developers diverted funds and delayed projects for which the loans were disbursed. Banks were in trouble recovering the dues as committed in the agreement. The buyers, on the other hand, were forced to repay after the particular period even without getting possession as per the complicated clauses of the agreement. When they resisted, legal issues cropped up. Projects were fast becoming non-performing assets.
“It was alleged that in the competitive environment, banks went overboard and disguised construction finance as mortgage loans to make their balance sheets look brighter. They looked the other way when the buyer was being grilled on the clauses of the agreement by the developer till the banks began to feel the brunt of it themselves. In some cases, they disbursed almost entire 80 per cent upfront so that they could start levying interest immediately,” said ND Mehta, a property consultant.
An industry source said that developers, who used this scheme then and now, are not small players who would have financing problems. These are big players with good holding capacities who exploited the banks and the buyers and made money and credited the consequences to both. This lot would be the most affected if the supply of cheaper funds suddenly stops.
Issues unresolved
There are some issues that are as yet unclear. One, the notification — as of now — applies to banks and not to housing finance companies. When contacted, a spokesperson
source:- http://www.financialexpress.com/news/real-estate-back-to-freebies-this-festive-season/1172139/2
The Just-concluded Ganesh Festival Has Not Shown Much Movement In Mumbai’s Real Estate Market. This Is Usually A Period When Buying Activity Starts And Is A Harbinger For The Turn The Market Would Take During Dussehra And Diwali, The ‘festive Season’ For Realty Players. But Pushed Into A Corner Due To The Slowdown, Developers Are Working Out New Schemes And Offers And Also Handing Out Gifts And Freebies.
A Recent Report By Jones Lang Lasalle (Jll) India Shows That Mumbai City Alone Has Unsold Inventory That Would Take 48 Months To Clear At Current Absorption Levels, While For Delhi-ncr It Is 21 Months. For Pune It Stretches 14 Months.
Given The Staggering Numbers, Developers Have Also Been Hit Hard By A Surprise Move From The Reserve Bank Of India That In A Notification On September 3, Asked Banks To Restrict Lending Under The 20:80 Scheme For Under-construction Projects. This Has Led To All Calculations Going Topsy-turvy.
“under The Notification, The Central Bank Has Particularly Advised Banks Against Upfront Disbursal Of A Significant Portion Of The Loan Amount To The Developer Without Linking The Same To The Stages Of Construction. Rbi Has Tightened The Norms To Protect The Interests Of Buyers And Contain The Fallout Of Such Innovative Housing Financing Schemes. It Feels That Any Default By Builders Could Affect The Credit Profile Of The Borrower And Expose Banks To Higher Npas,” Said Research Note From Crisil.
The Scheme
As Per The Scheme, A Tripartite Agreement Was Signed Between The Bank, The Developer And The Home Buyer Who Would Book By Paying 20 Per Cent Of The Total Cost. The Bank Would Give Almost 80 Per Cent Of The Remaining Amount To The Developer On Behalf Of The Buyer. The Developer Agreed To Pay The Interest And Some Principal Amount For A Stated Period Of Say 2 Years And On Possession, The Entire Amount Would Be Paid Back To The Developer By The Buyer.
“The problem was that the developers were using the credit line of the home buyer and were getting the funds as home loan at much cheaper rate of 10 to 12 per cent interest instead of construction finance which is usually given at 16 to 18 per cent,” said M Ganeshan, a buyer who has booked a flat in a township on the outskirts of Mumbai.
This is similar to the 10/90 scheme, launched in 2009-10 by some developers and banned subsequently. This was an advance disbursement facility scheme wherein 100 per cent money was disbursed irrespective of the progress of the project. These had created many problems and a speculative trend back then.
Over the period, several developers diverted funds and delayed projects for which the loans were disbursed. Banks were in trouble recovering the dues as committed in the agreement. The buyers, on the other hand, were forced to repay after the particular period even without getting possession as per the complicated clauses of the agreement. When they resisted, legal issues cropped up. Projects were fast becoming non-performing assets.
“It was alleged that in the competitive environment, banks went overboard and disguised construction finance as mortgage loans to make their balance sheets look brighter. They looked the other way when the buyer was being grilled on the clauses of the agreement by the developer till the banks began to feel the brunt of it themselves. In some cases, they disbursed almost entire 80 per cent upfront so that they could start levying interest immediately,” said ND Mehta, a property consultant.
An industry source said that developers, who used this scheme then and now, are not small players who would have financing problems. These are big players with good holding capacities who exploited the banks and the buyers and made money and credited the consequences to both. This lot would be the most affected if the supply of cheaper funds suddenly stops.
Issues unresolved
There are some issues that are as yet unclear. One, the notification — as of now — applies to banks and not to housing finance companies. When contacted, a spokesperson
source:- http://www.financialexpress.com/news/real-estate-back-to-freebies-this-festive-season/1172139/2
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