The existing 80:20 home loan schemes expose the borrower to risk in case of default in payments by the builder.
Earlier this week, the Reserve Bank of India cautioned home buyers on innovative home loan schemes, popularly known as 80:20 or 75:25 schemes. The interest in these schemes had heightened in recent months, as builders and developers increasingly found it difficult to access funding. The central bank has clearly nipped the growing interest in the bud. This is because the scheme, in its current form, seems to give a raw deal to home buyers. Read on to understand how.
THE ORIGINAL SCHEME
This scheme was pioneered by HDFC, a leader in the housing finance market in India. In mid-2000, Nahar group, a Mumbai-based developer had tied up with HDFC to offer the 80:20 scheme. Under this original scheme, the buyer paid 20 per cent of total value of home as upfront payment, and started paying the equated monthly instalments (EMI) after taking possession of the house. During the construction period, HDFC offered construction finance to the developer under its Advance Disbursement Facility Scheme (which it also offers to other developers). The home buyer hence did not have to bear any risk over and above 20 per cent in case of default by the developer.
THE TWEAKS
However, since then, the scheme which carries the same ‘80:20’ tag has been tweaked in many ways exposing the home buyer to a huge risk. Under the new schemes, the home buyer pays the 20 per cent of the full value of the house as upfront payment. Again, he enjoys the no-EMI period till he takes the possession of the house or for a fixed period for which the developer has offered to pay the pre-EMI interest on behalf of the home buyer. However, there is a tripartite between the builder, bank and the home buyer, where the loan sanctioned to the home buyer may be disbursed either upfront or as per stages of construction of the house. This has two-fold implications. One, the builder gets cheaper funding at interest rates meant for home buyers, a clear 3-4 per cent lower than what the builder would normally get from banks. And two, thehome buyer now undertakes the risk on behalf of the developer. When a builder is disbursed any amount from the loan sanctioned to the home buyer, the onus of repayment falls on the buyer and not the developer.
RBI TO THE RESCUE
While such schemes do offer a home buyer some relief on account of the ‘no pre-EMI’ option, most were still unaware of the risk they were exposed to, in case of project delays or default on payment by the builder. Further, any delayed payments by developers or builders on behalf of the home buyer, would also lower the credit score of home buyers in future.
With a view to address such risks to home buyers, RBI sent out a notification to all banks emphasising that the borrowers should be made aware of their risks and liabilities. The RBI has also urged banks not to make any upfront disbursal in case of incomplete or new housing projects. Banks will now need to monitor the construction and link disbursals to the stages of construction. Hence the risks to buyers may be mitigated to some extent.
Let’s hear out the builders
Property market participants shared their view on how RBI’s directive will impact builders and home buyers. Here’s a cross section of responses:
HIGH RISK
“Awareness levels about loans are low and customers don’t realise the negative effects of schemes such as 80:20 loans, if projects get delayed or if any other legal complications arise.”
-T Chitty Babu, Chairman and CEO of Akshaya, a Chennai-based builder.
“Many buyers do not understand that they are the most exposed party in the tripartite agreement between the bank, builder and buyer in an 80:20 loan deal.”
- Brijesh Parnami, CEO, Distribution, Destimoney Enterprises, a home mortgage advisory.
LIMITED REACH, IMPACT
“Only around 15 per cent of the supply in the market might have been using this promotion. It is likely that only 35 per cent of Grade A builders, under 10 per cent of Grade B builders and hardly any Grade C builders offered this scheme.”
- Ganesh Vasudevan, CEO of IndiaProperty.com.
“(Although) customers demanded for this proposal as a pre-condition for booking, only fewer than half of the customers finally opted for the scheme.”
- Ashwini Kumar, ED and COO, Nitesh Estates, a Bangalore -based builder.
“Banks had approached us with this proposal but we did not consider offering it. In the short term, a few projects may see a fall-out but overall sales are unlikely to be affected.”
-Hari Prakash Pandey, V-P Finance, HDIL, a Mumbai-based developer.
WILL DAMPEN SPIRITS
“This scheme helped bring in good buyer interest and removing this will likely cause a drop in sales.”
- Vummidi Ananth, MD, BBCL, a Chennai-based developer.
“Developers with deeper pockets can sustain, but the rest will have to either look at selling the core assets to bigger developers or reduce the price expectations from home buyers.”
-Gulam Zia,Executive Director, Knight Frank India.
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