DETAILS OF 20:80 SCHEME India Inc India Inc: Thursday, 09 May 2013 09:43 Realty Corner with Deepak Varghese - Rise of the grand 20:80 scheme The Home loan pre-emi scheme, also known as the 20:80 scheme, has been in existence for a few years but never so widely used before. Under the scheme, the developer of an under-construction residential unit offers the buyer an option by which he covers the interest on a home loan until the unit is delivered or for a fixed period of 12-24 months in return for the buyer accessing the loan from a provider recommended by him. The entire loan amount, which is nearly 80 per cent of the contracted value of the sale, is paid out to the developer even if only 20 per cent of the construction is completed. All is then well for the seller and buyer if construction were to go on as per schedule, with the developer gaining from a lower interest rate on this borrowing (given that home loan rates are a third lower than construction finance rates) and the buyer gaining from an interest holiday with an option to continue paying instalments that will go towards reducing the tenure of the loan. Given the current tight liquidity situation in the real estate sector, combined with a slow off take in sales, buyers availing of this scheme must also consider the possibility that construction could be delayed. The interest holiday period, if time-bound, could lead to the bank demanding instalments be paid without the home being delivered. An even more serious scenario would be that the developer, having drawn down on the full limit of the pre-emi scheme with the bank – which normally is capped to the extent of construction finance – using it to repay the loan and stalling construction. Long delays in completion of projects, which happened in the 1997/2000 period across the country and then again in Mumbai between 2004 and 2007 due to legal matterssurrounding mill land sale, would mean that the buyer-borrower would have to continue paying monthly instalments without a sign of getting the home delivered. While financially stronger developers are a bit more resilient to economic conditions, retail buyers look to banks and home loan companies having a strong due diligence process in choosing developers for the pre-emi scheme. In their mind, it is an endorsement which will be strongly disagreed by the lenders. This scheme is now gaining currency across the major markets and across all tiers of developers – I saw a local developer advertising this scheme at Karjat, 40 kms away from New Mumbai. But are the retail home buyers going to face the burden of the home loan institutions transferring their risks to the end user in case of the developer defaulting? Deepak Sam Varghese, founder-director of Moonbeam Advisory, is a career banker with nearly two decades of experience in retail and private banking. He is a specialist in banking services and wealth advisory and has been advising domestic and non-resident Indians (NRI) in Mumbai, Delhi, Dubai, Singapore and London, where he was based. Now Bangalore-based, his special emphasis is on financial advisory in real estate transactions, advising investors and developers in key Indian metros.
Posted on: Mon, 01 Jul 2013 05:50:22 +0000
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