Builders face cancellations as 10:90 loans dry up

The 10:90 bubble’s going phut, contrary to the view of developers who were convinced that the innovation was a perpetual goldmine.

The scheme, under which a real estate buyer paid only 10% of the property cost at the time of booking and 90% at the time of possession, was the buzz during the festival season.

However, it was felt that such loans were risky for banks and so the Reserve Bank of India (RBI) stepped in and tightened the provisioning norms for such loans.

Bank approval rates for these loans have fallen steeply since then, because of which it is the builders who are now staring at possible cancellations.

Builders such as Indiabulls Real Estate (IBREL), Lodha Group and Nahar Group are among those to have floated this scheme.

Analysts said banks were rejecting loans because buyers failed the eligibility norms. Less than a sixth of the loans for such projects were getting passed, an analyst said.

“Such buyers are cancelling their bookings,” he said.
Another Mumbai-based analyst with a foreign brokerage said some top builders stopped this scheme two-three weeks back.
The RBI intervention would not have an impact on its sales since loans are yet to be sanctioned, he said.

Many developers are charging Rs23,600-28,000 per square feet for these properties, he said, adding, “When oversupply brings down prices and buyers default on payments, banks will be forced to sell these properties at big discounts, which will burst the bubble.”

Lodha Developers has sold 70 of the 100 flats it had put up for sale under this scheme, said R Karthik, senior vice-president - marketing, Lodha Group.

The average cost of the 3000-4000 sq ft flats was Rs10 crore and a tenth of the buyers did not opt for the 10:90 scheme. “Our buyers have tied up with Axis bank, IDBI, HDFC and SBI. It was a short-term scheme to get people like CEOs and financial services professionals into this segment,” said Karthik.

An official spokesperson of IBREL said the company has 300 bookings for its projects including SkySuites and Sky Forest, of which 100 clients have received loan sanctions, while 7 applications were rejected.

A senior official of State Bank of India, the biggest home loan provider, said, “One developer had come to us, but we need a margin of 15%, corporate guarantee of the mortgage of the property and 25% equity for home loan. They had already tied up for mortgage with other consortiums so we did not tie up for this scheme. And we give loans in a 25:75 ratio and in some special cases at 15:85, but not beyond that.” That ruled out the 10:90 schemes.

Banking sources said, “The agreement is clearly between the bank and the buyer, so if the developer tomorrow doesn’t pay or defaults, it is the buyer who has to pay up. Also, the sanctions have been very few as banks are becoming strict and only 10-15% sanctions have come from ICICI; HDFC’s sanctions are even lesser.”

An analyst from another domestic brokerage said, “Some builders are giving loans through their non-banking finance company under this scheme. But what happens if cancellations start happening as loan approvals are so few? The revenue that they have already booked for the second quarter will go for a toss.”

The problem with the 10-90 scheme is also that developers agree to pay interest only till the construction is completed. A buyer, on the other hand, gets possession only after the civic authorities give the occupancy certificate, pointed out an analyst with a foreign real estate consultancy.

“So you have this one-year gap because OCs normally take that much time after the construction is complete. That would mean buyers will have to foot the interest bill for the period.”

“If the developer is selling property claiming it would undertake interest subvention for that period, then the buyer should ensure that mentioned clearly in the agreement,” the aforesaid consultant said.

Ambar Maheshwari, director of investment advisory services, DTZ, another consultancy, said, “The scheme has many fallacies right at the beginning. It’s the buyer who will have to pay if the developer defaults or delays the construction schedule. Also, here, the bank is taking the risk to fund such a project, which is generally bought out by investors.”

Banks have also become wary of giving out such loans because their regulator, the Reserve Bank of India, looks down upon such lending practices. “So our management is not going to roll out the schemes in a huge manner,” said the official of a top public sector  bank.