Home loans: Central bank bars upfront payments to developers RBI’s curbs are likely to deal a blow to the so-called 80:20 or 75:25 schemes floated by builders across cities. The Reserve Bank of India (RBI) on Tuesday made it mandatory for disbursements of housing loans by banks to be linked to the stages of completion of the property and not paid upfront to the builder. This will deal a blow to so-called 80:20 or 75:25 schemes floated by builders across Indian cities. Under these popular schemes, a home buyer pays 20-25% of the price while the builders arrange the rest from banks at the time of the launch of a project. Such loans involve a tripartite agreement among the builder, the lending bank and the buyer. The buyers make the payment upfront while the rest is provided by the banks on which the builder pays interest till the property is handed over to the buyer. At the time of possession, the loan is transferred to the buyer. “Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks,” an RBI notification said. Since the loan is in the name of the buyer of the house, any delayed payment of interest by the builder harms the credit score of the buyer instead of the developer, RBI said. These schemes have been popular in recent times as the liquidity-strapped developers use it for propelling sales. Deepak Parekh, chairman of India’s largest mortgage finance company Housing Development Finance Corp. Ltd, had warned against such products at the company’s annual general meeting in July: “As a basic tenet, construction finance entails higher risks and therefore, such risks have to be built into the pricing. Construction finance should not, through any innovative structuring be available to developers at the rate of interest being offered on individual home loans. Further, complete up-fronting of construction finance to developers, even before the ground is broken is dangerous.” Developers are, expectedly, not happy. “The scheme has been doing good for the industry and the customers. It will impact the sales in a huge way. It is shocking,” said Lalit Kumar Jain, chairman of developer’s lobby Confederation of Real Estate Developers’ Associations of India (CREDAI) and chairman and managing director of Kumar Urban development Ltd. Property market analysts said the central bank’s directive would make real estate pricing more transparent. “This move by RBI is aimed at protecting the interest of property buyers who are not aware of the long- term financial implications of such and similar schemes,” said Shobhit Agarwal, managing director- capital markets, Jones Lang LaSalle India, a real estate consultancy. “By bearing the interest payments, the developer was essentially giving the buyer a discount and holding on to an artificially propped up property price. This will force the developer to officially lower the price of the project,” said the executive director of a public sector bank in Mumbai, who did not want to be named. “Whatever sales that has been happening was though this scheme. With this opportunity gone, the price corrections are going to happen faster as the developers are left with no other option,” added Pankaj Kapoor, managing director of Liases Foras, a real estate research firm. Research by the company has shown that sales are down by 50%, and inventory, up 100%, compared to 2009 in the Mumbai real estate market. Residential property prices in most Indian cities declined in the quarter ended June 2013, as against the continued upward trend seen in last two quarters, according to the National Housing Bank’s residential index that tracks the movement in prices of residential properties on a quarterly basis
Posted on: Wed, 04 Sep 2013 05:42:27 +0000