A directive from the National Housing Bank has caused a flutter in realty circles, as it seeks to restrain financing companies from handing out loans that are serviced by the developer on behalf of the homebuyer till project completion.
The housing regulator's circular, issued on Friday, directs housing finance companies (HFCs) to disburse loans procured under subvention schemes according to the stage of construction of the project.
It also recommends that financiers desist from making upfront disbursals for under-construction projects.
The directive comes in the wake of reports that HFCs are exposed to unforeseen risks by loan instruments linked to subvention schemes offered by developers.
Under the scheme, a buyer can take out a loan for an under-construction project for which the developer pays the interest till its execution.
Developers launch subvention schemes to access funds when banks are unwilling to lend directly at a low rate to them when, say, liquidity is tight. The scheme also helps buyers, especially those who do not want to commit a big sum upfront amid expected project delays, by giving them a hidden discount.
Subverting Subvention
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| NHB circular dismantles subvention schemes offered by builders |
| Realty players say move to hit sales in metro cities |
| Will also discourage buyers, who were attracted to a project mainly by these schemes |
NHB general manager V Vaideswaran said the directive comes amid instances of fraud committed by builders using subvention schemes.
Real estate consultants Knight Frank said subvention schemes were offered by A-list developers in whom lenders reposed confidence.
"About 10-12% of home loan market in the top eight cities was subvention schemes used by developers to attract homebuyers for under-construction properties," said Gulam Zia, executive director, Knight Frank India.
"After this directive, transaction volumes may come down in metro cities."
He said that in recent times subvention schemes were also being extended to finished properties where inventory was piling up. "But the new ruling will make a dent in this side of market," he said.
Vaideswaran said HFCs, while extending finances, should factor in stipulations of the Real Estate (Regulation & Development) Act, 2016, which aims to promote transparency and efficiency in the real estate sector to protect consumer interests.
Anarock Property Consultants chairman Anuj Puri observed that the housing regulator's move throws a spanner in the works of subvention schemes proffered by developers. "It will impact their liquidity and discourage buyers who were attracted to a project mainly by these schemes," he said.
The move also reflects the increasing focus on executing projects, with HFCs being directed to have a "well-defined mechanism" to monitor the construction progress. "This is sound reasoning. In these troubled times of stalled and heavily delayed projects, construction progress has become a Holy Grail," Puri said.
Paradigm Realty managing director Parth Mehta pointed out that the NHB directive would hamper the sales cycle of realty developers, as it would be difficult for buyers to solicit loans from banks on under-construction projects.
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