The 20:80 scheme is back in the real-estate market. The scheme, which requires home buyers to pay only 20% of the cost upfront, with 80% being funded by banks, was frowned upon by the RBI in 2013.
One of the RBI's concerns was that the scheme was widely used by property developers to procure funds at low interest rates.
Now banks like IDBI Bank and Axis Bank have joined hands with property developers to offer the scheme. Several NBFCs such as Indiabulls Finance and home financier HDFC are also testing waters.
Wadhawa Group, Victory Realty, Rajesh Lifestyle and Ahuja Group, among others, have floated the scheme in Mumbai. In fact, the 20:80 scheme is now appearing in different formats like 10:80:10, 25:75, and 5:90:5, with most of the amount pooled in by the end of construction and the remaining by the time of possession.
How does it work for home buyers?
The buyer pays 20% of the total cost upfront and the bank disburses the entire loan to the builder through the individual. The builder agrees to pay interest on the borrower's loan during construction. Once the home buyer takes possession, he will have to pay the interest. More often than not, this interest rate will be higher than the market rate. The buyer ends up paying a `price' for opting the scheme early.
How will the builder use the money?
The builder finances the project with the loan, and agrees to pay interest on behalf of the borrower. Builders get loans at 10.5%-11% against the 20-30% that other sources such as private equity investors and financiers would charge them.
Were home buyers really benefiting?
Sandeep Sadh, CEO at Mumbai property exchange portal, said developers used to get the total flat cost from buyers and banks, even though the project was not completed. "Buyers were paying the full EMI even though they had not got possession. It was a faulty scheme where buyers and banks were exploited by developers."
Why did RBI raise a red flag?
In September 2013, RBI said in a circular: "In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of housing project/houses…" The central bank also said that upfront disbursal "should not be made in cases of incomplete/under-construction/green field housing projects."
Were there other concerns?
RBI wanted banks and home buyers to be wary of such schemes as a default by the builder could affect the credit profile of the borrower and expose the banks to higher bad loans and possible diversion of funds.
Why do banks fund such schemes?
A senior IDBI official told dna, "We are funding real-estate projects, especially residential ones. But we disburse the money only on completion of construction. So the construction has to be completed by the builder's equity and then we finance him." A senior official from Axis Bank said, "We lend to real- estate projects, but we really have to examine if it is under any special scheme or not."
What do builders say?
Builders say these schemes are very much in demand in the market. Vijay Wadhwa, chairman at Wadhwa Group, told dna that, earlier, banks had stopped releasing loans because developers could not either execute or complete projects due to the absence of various government approvals. "Now, banks are checking the approvals before offering the loan. Only a few developers who have completed the formalities get the loan."
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