NHB Circular On Interest Subvention Schemes May Affect Realty Funding

The National Housing Bank has advised housing financiers to desist from funding schemes in which developers offer to service interest on housing loans on behalf of borrowers, citing the prevalence of fraud in them.

The NHB, in a circular on subvention schemes offered by builders, said the disbursal of housing loans should be strictly linked to the stages of construction and no upfront disbursal should be made in incomplete projects or those under construction. “Several complaints have been in relation to the aforementioned housing loan products,” it said in the circular. “Further, instances of frauds having been allegedly committed by certain builders using subvention schemes have also been brought to the notice.”

NHB said prevalent products of housing finance companies, if any, should be reviewed on the above lines. The directive, it said, shall be effective even when the financier is yet to commence disbursements under the sanctioned cases.

Some popular subvention schemes in vogue include the “5:95” and “10:90” schemes, in which buyers make the down payment for the property, with developers servicing loan repayments until project completion. They are usually offered in projects being developed in metropolitan regions, including Mumbai.

In cases of projects sponsored by the government or statutory authorities, the housing financier may disburse loans as per the payment stages prescribed by such authorities, even where payments sought from homebuyers aren't linked to the stages of construction, provided such authorities have no past history of non-completion of projects, the NHB said.

Prescribing norms for construction lending, the NHB said housing finance companies must have in place a well-defined mechanism for effective monitoring of the progress of construction of housing projects and obtaining consent of the borrower/s prior to release of payments to the builder/developer. It also said housing financiers, while extending finance should account for stipulations laid down under Real Estate (Regulation and Development) Act, as applicable.

‘Circular Also Needed For Banks'

Yashpal Gupta, managing director and chief executive officer of Repco Home Finance told BloombergQuint in an interaction the scheme was effectively being used for builder funding in the name of customer funding, he said. To that extent it's a good move, he said, but at the same time it will further dry up funds for real estate sector.

Gupta said the circular hits hard where it says existing sanctions should also not be disbursed. I don't think this will lead to distressed sales by developers but select builders will be affected and they may reduce prices, he said. He expects growth to be hit in 6-12 months, with stability returning in the long-term. I hope the Reserve Bank of India will also come out with a similar circular for banks, he said.

“We have zero exposure to such type of funding and hence it will not affect us,” Gupta said. “In the case of some companies it's as high as 10 percent.”

What Brokerages Say

Morgan Stanley said in a note this could be an additional business headwind for stressed or weaker developers or projects and their financiers.

Antique Stock Broking agreed, saying this will further slow growth for housing financiers heavily dependent on developer-led housing. Subvention schemes like 5:95 are prevalent in large metros and provided easy funding at lower rates to developers, said Digant Haria, analyst at Antique Stock Broking. “While this may have temporary impact on good developers with genuine sales too, it will put an end to widespread misuse of this route.”