 "RBI diktat on 20:80 loan saves your credit score, money")
The Reserve Bank of India (RBI)'s concern over the 20:80 or 25:75 home loan schemes will help many from getting a poor credit score and also help them save some bucks. At the same time, it could delay housing project even more.
What is a 20:80 scheme? Under this scheme, the loan borrower has to pay up 20% of the cost of an under construction house and the remaining 80% is paid up entirely by the bank to the builder, on behalf of the borrower.
Given the entire loan is being paid to the builder, the borrower is offered a discount by way of builder paying the interest cost of the loan to the bank for a fixed period.
Most banks, especially the private sector banks, offer this scheme. However, most industry experts say the scheme has not been very popular off late, that is, in the past six to nine months.
Builders prefer this scheme because they get funds even before the house is ready, that too at the retail rate of interest. This helps banks expand their loan portfolio faster. And borrowers agree to it thinking that advance payment will guarantee early delivery of the house and during the moratorium period the construction risk lies with the bank. Unfortunately that's not true.
“If the builder defaults on payment to the bank or if the project construction is delayed, the bank will come after the borrower for payment. And if the borrower cannot pay up at that time, it will show on his / her credit score,” says Harsh Roongta of Apnapaisa.com.
Once loan disbursement for under construction properties get linked to the construction stage of the project or house, the deal will be less money at stake for the borrowers. At the same time, builders will not be able to use funds for more than one project after this.
Otherwise, when builders get funds for one project, they may or may not use the funds for that project. Depending on the project delivery deadline, builders could use the funds for other projects as well.
Banning this scheme will impact the builders the most as without cashflows have dried up for the realty sector at present. Linking loan disbursal to construction stage will tighten the purse strings thus impacting new launches and liquidity of the developers.
After these norms, the possibilty of housing project getting delayed further cannot be ruled out, says R S Sangapure, general manager – retail at Central Bank of India. These norms will also make sure that developers use funding for the project it is meant for only, he adds.
And in the absence of a good cashflow, real estate developers could pressurise home buyers to pay from their pockets till the time the bank disburses the loan. This is a common even now.
According to Shobhit Agarwal, managing director – capital markets at Jones Lang LaSalle India, the basis of this move is that though these schemes do invariably mention the financial implications to the consumer in the fine print, many consumers are evidently unable to decipher the fine print.
This move is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is meant to advance greater transparency in the real estate sector.
What is a 20:80 scheme? Under this scheme, the loan borrower has to pay up 20% of the cost of an under construction house and the remaining 80% is paid up entirely by the bank to the builder, on behalf of the borrower.
Given the entire loan is being paid to the builder, the borrower is offered a discount by way of builder paying the interest cost of the loan to the bank for a fixed period.
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This fixed or moratorium period varies between one-and-a-half to three years depending on the bank and the project. Bankers say this option is offered to selective builders only.
Most banks, especially the private sector banks, offer this scheme. However, most industry experts say the scheme has not been very popular off late, that is, in the past six to nine months.
Builders prefer this scheme because they get funds even before the house is ready, that too at the retail rate of interest. This helps banks expand their loan portfolio faster. And borrowers agree to it thinking that advance payment will guarantee early delivery of the house and during the moratorium period the construction risk lies with the bank. Unfortunately that's not true.
“If the builder defaults on payment to the bank or if the project construction is delayed, the bank will come after the borrower for payment. And if the borrower cannot pay up at that time, it will show on his / her credit score,” says Harsh Roongta of Apnapaisa.com.
Once loan disbursement for under construction properties get linked to the construction stage of the project or house, the deal will be less money at stake for the borrowers. At the same time, builders will not be able to use funds for more than one project after this.
Otherwise, when builders get funds for one project, they may or may not use the funds for that project. Depending on the project delivery deadline, builders could use the funds for other projects as well.
Banning this scheme will impact the builders the most as without cashflows have dried up for the realty sector at present. Linking loan disbursal to construction stage will tighten the purse strings thus impacting new launches and liquidity of the developers.
After these norms, the possibilty of housing project getting delayed further cannot be ruled out, says R S Sangapure, general manager – retail at Central Bank of India. These norms will also make sure that developers use funding for the project it is meant for only, he adds.
And in the absence of a good cashflow, real estate developers could pressurise home buyers to pay from their pockets till the time the bank disburses the loan. This is a common even now.
According to Shobhit Agarwal, managing director – capital markets at Jones Lang LaSalle India, the basis of this move is that though these schemes do invariably mention the financial implications to the consumer in the fine print, many consumers are evidently unable to decipher the fine print.
This move is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is meant to advance greater transparency in the real estate sector.