The RBI notification restricting loans under 20:80 scheme has developers reworking strategy to woo buyers without reducing prices. Some are coming up with new variants while others are banking on gifts and freebies
The just-concluded Ganesh festival has not shown much movement in Mumbais real estate market. This is usually a period when buying activity starts and is a harbinger for the turn the market would take during Dussehra and Diwali,the festive season for realty players. But pushed into a corner due to the slowdown,developers are working out new schemes and offers and also handing out gifts and freebies.
A recent report by Jones Lang LaSalle (JLL) India shows that Mumbai city alone has unsold inventory that would take 48 months to clear at current absorption levels,while for Delhi-NCR it is 21 months. For Pune it stretches 14 months.
Given the staggering numbers,developers have also been hit hard by a surprise move from the Reserve Bank of India that in a notification on September 3,asked banks to restrict lending under the 20:80 scheme for under-construction projects. This has led to all calculations going topsy-turvy.
Under the notification,the central bank has particularly advised banks against upfront disbursal of a significant portion of the loan amount to the developer without linking the same to the stages of construction. RBI has tightened the norms to protect the interests of buyers and contain the fallout of such innovative housing financing schemes. It feels that any default by builders could affect the credit profile of the borrower and expose banks to higher NPAs, said research note from Crisil.
The Scheme
As per the scheme,a tripartite agreement was signed between the bank,the developer and the home buyer who would book by paying 20 per cent of the total cost. The bank would give almost 80 per cent of the remaining amount to the developer on behalf of the buyer. The developer agreed to pay the interest and some principal amount for a stated period of say 2 years and on possession,the entire amount would be paid back to the developer by the buyer.
The problem was that the developers were using the credit line of the home buyer and were getting the funds as home loan at much cheaper rate of 10 to 12 per cent interest instead of construction finance which is usually given at 16 to 18 per cent, said M Ganeshan,a buyer who has booked a flat in a township on the outskirts of Mumbai.
This is similar to the 10/90 scheme,launched in 2009-10 by some developers and banned subsequently. This was an advance disbursement facility scheme wherein 100 per cent money was disbursed irrespective of the progress of the project. These had created many problems and a speculative trend back then.
Over the period,several developers diverted funds and delayed projects for which the loans were disbursed. Banks were in trouble recovering the dues as committed in the agreement. The buyers,on the other hand,were forced to repay after the particular period even without getting possession as per the complicated clauses of the agreement. When they resisted,legal issues cropped up. Projects were fast becoming non-performing assets.
It was alleged that in the competitive environment,banks went overboard and disguised construction finance as mortgage loans to make their balance sheets look brighter. They looked the other way when the buyer was being grilled on the clauses of the agreement by the developer till the banks began to feel the brunt of it themselves. In some cases,they disbursed almost entire 80 per cent upfront so that they could start levying interest immediately, said ND Mehta,a property consultant.
An industry source said that developers,who used this scheme then and now,are not small players who would have financing problems. These are big players with good holding capacities who exploited the banks and the buyers and made money and credited the consequences to both. This lot would be the most affected if the supply of cheaper funds suddenly stops.
Issues unresolved
There are some issues that are as yet unclear. One,the notification as of now applies to banks and not to housing finance companies. When contacted,a spokesperson for the National Housing Bank,which regulates housing finance companies,told The Indian Express that no such notification on the 20:80 scheme has been issued to these institutions.
Secondly,RBI wrote to various segments of banking sector such as urban cooperative banks and regional rural banks about this order over several days. During this interregnum,many banks and developers have managed to complete the deals under the scheme,industry sources said on condition of anonymity. Since it is not retrospective,they would be spared as well. The notification is assumed to be for the new deals.
If banking sources are to be believed,many back-dated agreements will be signed due to lack of a monitoring system. At one sales counter,a buyer was told that post-notification,prices would increase and the helpless buyer succumbed to it and agreed to go ahead with a back-dated agreement.
RBI has insisted that the disbursement should be construction-linked. A banking source said that not every bank has competent experts to understand or ascertain the construction process for the disbursement of the fund. One can always hire those services from outside but then,it might just open up another window of nexus and corruption,the source added.
New Avatars
In the current slow market,most developers were planning to take advantage of the festive season with 20:80 schemes. After the RBI notification,several advertisements under the scheme were immediately withdrawn,and new variants are slowly making an appearance. It is evident from the sudden withdrawal that developers were interested only in cheap funds and were not bothered about the buyers, said Ganeshan.
One developer in the Mumbai region has advertised an interesting scheme. He proposes that after paying the booking amount of 20 per cent up front,the buyer needs to pay 20 per cent once every year,with the last instalment of 20 per cent on possession. The project has not yet started and a company representative said that it would be ready in 2016. This would not be linked to the progress of construction,though. This is irrespective of the loan.
There is another scheme doing the rounds: the 10:80:10 that is no different,only that payments are staggered in different proportions.
Its a sign that the residential sales are far behind developers expectations. The need of the hour would be developers to take a relook at the inflated prices they are quoting and the banks to come up with schemes which genuinely stagger out the financial liability of the buyer. If structured right it could go a long way in easing out the heavy inventory burden, says Ganesh Vasudevan,CEO,Indiaproperty.com.
The key question then,will prices see a correction?
Any discounts that we see this festive season will be a function of developers need to sail through the current difficult market conditions. With the slightest indication of a recovery in economy,this window of opportunity will close,as has been amply evidenced in the past, said Ashutosh Limaye,head-research,JLL India.
Festive outlook
Given the general economic slowdown and the headwinds they are facing,industry observers say that developers would avoid payment schemes for the most part and would bank on the usual freebies to woo buyers. Some are gifting gold coins with each booking while others are working on special (discounted) rates and even paying up stamp duty and waiving some charges. Then there are the usual furniture,refrigerators,cars etc. Experts,however,advocate caution.
Actual price discounts are thinner on the ground and are not seen as the ideal marketing tool as developers do not wish to send out distress signals into the market. Buyers with cheque books and/or pre-approved home loans in hand are in a position to bargain for a better price. The ability and willingness to make a down-payment is the best position from where to pitch for a discount, said Om Ahuja,CEO residential services,JLL India.