The National Housing Bank has ordered housing finance companies to cease from extending loans provided under the subvention scheme. This direction was issued by the National Housing Bank in view of several complaints of frauds filed by the home buyers against certain builders using subvention schemes. The main purpose of National Housing Bank for taking this move is to control the liquidity position of real estate developers further. This will lead to increase in interest cost for home buyers. On based of the status of the construction, the Housing finance companies should disburse loan tranches to the developer. National Housing Bank said that subvention schemes expose home buyers who have taken the loan and housing finance companies to other risk in the occurrence of a default by the builder or non completion of project on given time.
Subvention Scheme:
Subvention scheme is offered by the builder to his home buyers by the way of tie up with the banks. For attracting customers, these schemes were heavily promoted by many discounts and freebies. These schemes attract buyers by allowing them by paying low upfront amount of 5% to 20% to book the property. The home buyers did not have to pay any EMI, until the possession of the apartments/flat. Instead, the developers have to pay the EMI’s on behalf of the borrowers, till a period date of possession or the period that was specified in the contract. The Subvention schemes are mostly sought by home buyers who do not want the burden of EMI’s till the time they move into the apartment. The loans under subvention schemes are a cheaper source of funding for builders as these types of loans are given on the bases of income of the buyer and it will not reflected in the accounts of the developer. In case a builder would raise funding to complete the entire project on their own then the builder has to pay interest much higher than normal home loan rate. So by ceasing of this scheme will vanish the cheaper source of funding for builders.
Withdrawal of subvention schemes affect on property prices?
Many experts and developers maintain that the cost of capital in the absence of these subvention schemes, will increase slightly and thereby, reduce their profit accordingly. However, developers may resort by increasing other revenue charges such as parking charges, development charges, clubhouse charges, maintenance charges etc. to absorb the increased cost. In the short term, there can be a drop in sales, which can lead to a further reduction in cost. While this may benefit the market in a long term and some lenders and small developers may find it difficult to survive. Real estate companies are mostly depending on such kind of schemes for an alternative to discounts. By withdrawing of such schemes could take the sector in trouble and may risk slowing sales velocity or asset costs. Developers usually seek installment wise payment from their customers. These payments are linked to project completion milestones. However, these fixed payment schedules cannot be challenged nor appraised by the customer or housing finance companies. By these slab wise payment the developers drawing funds faster than that required in the project and using it to other projects. Real estate developers also seek support from the government to seek funding alternate for the industry as several funding system used by the sector are draining due to increased government oversight.
Options for builders and buyers :
By desist of subvention schemes, will eliminate speculative investor from buying houses and builders/developers will go back to the other construction linked payment schemes. However the RBI will come up with improved guidelines, to limit the subvention schemes and to reduce speculative investments in real estate. Also in the absence of subvention schemes, the transactions are likely to come down in metro cities. In current time, the subvention schemes were extended to even ready to move apartment wherever unsold real estate inventory was piling up. The new decision will make a dent on this side of market too. Now the home buyers may prefer projects where they have obtained the occupancy certificate to avoid chances of delay in construction of their project.