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Many banks and housing finance companies have introduced home loan products, popularly known as 80:20 or 75:25 schemes, involving a tripartite agreement between the lender, the builder and the buyer of the housing unit. Under these schemes, the bank disburses the sanctioned individual housing loan to the developer upfront without linking the disbursal to various stages of construction of the project. To convince buyers to enter into such an agreement, builders often offer price discounts.
“In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project and upfront disbursal should not be made in case of incomplete or under construction or greenfield housing projects,” RBI said in a notification. Real estate developers and consultants said it is a huge setback for real estate, which was facing a severe slowdown in cities such as Mumbai.
“RBI wants to kill growth in real estate sector with this notification. The NPAs (non-performing assets) in home loans are very low. RBI does not mind Rs 5 lakh crore loan given to top industrial groups, but it is worried about defaults in home loans taken by individuals. In 80:20, the maximum loan amount is Rs 1 crore,” said Vimal Shah, managing director of Hubtown, a Mumbai developer and president of Maharashtra Chamber of Housing and Industry.
“In cases where bank loans are also disbursed upfront on behalf of their individual borrowers, in a lump-sum to builders without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds,” RBI said. Also, any delayed payments by developers on behalf of individual borrowers to banks may lead to lower credit rating of such borrowers by credit information companies.
“It is emphasised that banks, while introducing any kind of product should take into account the customer suitability and appropriateness issues and also ensure that the borrowers are made fully aware of the risks and liabilities under such products,” RBI said.
Some of the industry players had expressed concerns that builders were getting loans at individual home loan rates through these schemes. “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,” Deepak Parekh, chairman of HDFC, had said in the company's annual report for 2012-13.
He had also warned home buyers to be wary of teaser products offered by real estate developers.
A senior Bank of India official said this (the 80:20 scheme) was becoming an indirect route to fund builders, as it was done at a lower interest rate and as it was a ‘home loan’, it carried less risk. Also, the entire risk fell on the borrower.
In this arrangement, the risks are underestimated and banks end up making less provisions than required. Currently, direct loan to builders had interest of more than 12 per cent, while loans to individual borrowers had rates of about 10 per cent (similar to the base rates of banks), the official said. The risk weight for builder (commercial real estate) is more than 100 per cent, while the risk weight for home loans is only 50 per cent. So banks “saved” on capital, he added.
“The banking regulator felt that such products increase the risk for both banks and borrowers especially if there is a dispute between the buyer and the builder or the project is not completed on time,” said Anuj Puri, chairman, Jones Lang LaSalle, realty consultant.
