RBI - NIPPING REALTY 'SCHEMES' RIGHT AT THE BUD

By Ruma Dubey

Realty stocks slumped today morning and most of the developers/builders were very glum. That is a clear sign that something right must have happened for the common man.

We all would have come across builders/developers at some point of time or other. Thus we all would be very familiar with the attitude of most builders/developers who take away as much money from us as possible, without they themselves delivering little to nothing. We buy a home putting our entire life savings and then even after paying; we are the mercy of the builder. There are instances where people have paid up over 75% of the total cost of the apartment with not even the first plinth coming up. Many can say that people should refuse to pay. Well, we all know that does not work.

Thus it comes as a great relief to know there is finally some protection for the brave common man. RBI has yesterday asked banks to link the disbursal of home loans to stages of construction to protect the interests of buyers and contain the fallout of "innovative" housing financing schemes.

It is during time of crisis that all innovations happen – good as well as bad. But this particular scheme reeks of exactly that – a scheme. Shockingly, some banks have linked up with developers/builders and approve upfront disbursal of sanctioned individual housing loans to the builders. These approvals are done without linking the disbursals to various stages of construction of housing project. In these ‘innovative’ schemes – known as 80:20 or 75:25 schemes, wherein the interest or EMI on the housing loan availed of by the individual borrower is serviced by the builders during the construction period/specified period.  And banks take this a step further by signing a tripartite agreement between the bank, the builder and the buyer of the housing unit.  This is like a Supreme Court Judge conniving with the police and the robber to reach an ‘amicable’ agreement. Such arrangements are breeding grounds for deep rooted corruption which can lead to a sub-prime like crisis. Here too, the builder takes it all while the banks and home owner faces risk. When banks disburse a lump sum without linkages to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds. And with banks already staring hard at mounting NPAs, are such risks needed. More importantly, isn’t this ethically wrong?

Builders as such run realty companies today like Ponzi schemes. They have the land, so they announce projects. Affordable housing projects are out and hence every builder with land announces super luxury projects. They announce the project and assuming that even if they are able to sell 10% of the proposed project, they demand an upfront payment of 20%. When flats are worth Rs.5 to Rs.10 crore, 20% is a lot of money.  That money is then put into other projects announced earlier and to be handed over shortly. For eg: a builder might have a super luxury project in Goregaon which needs to be handed over by 2013, so they announce another project in say, Parel and money collected there will be used to fund the Goregaon project first.  And to fund Parel, whose handover date might be 2015, they might announce a project in Worli in 2013. As long as these builders own land, this way, money is put from one project to the other and every new project announcement becomes a scheme to fund their previous project. This way they don’t need to borrow and thus keep their business running. And where is the need to bring down the price at all? Infact as they keep on completing the project, they feel justified to hike the price, which is why expecting prices to come crashing down would be naïve. It would be interesting to see how these developers now deal with money coming in linked with their construction stages as they would now be unable to divert funds as per their own whims and fancies.

Anything which involves a lot of money and left at the discretion of the builder, with no monitoring and accountability, surely spelt disaster for the home buyer. And for the banks - it is shocking that banks fall for such traps, especially when they are entrusted with such major money decisions. Makes one realize why banks today have such high NPAs when foresight is so blinded.