about 12 months ago
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You look up the word in the dictionary and it says , “A subsidy or government incentive in the form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy.”

So interest subvention means a subsidy offered on the interest paid by the borrower wherein he/she does not have to pay the total interest on loan amount, with balance being borne by the lender or concerned party.

This might probably be the most hated word for the realty sector and builders right now following the National Housing Bank’s (NHBs) directive.

The NHB has ‘advised’ housing finance companies (HFCs) to desist from offering loan products involving servicing of the loan dues by builders/ developers etc. on behalf of the borrowers. The prevalent products of HFCs, if any, should also be reviewed on the above lines. NHB said that the stipulation shall also be effected in cases wherein the HFC is yet to commence disbursements under the sanctioned cases. 

NHB said that the disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses. In cases of projects sponsored by the Government/statutory authorities, HFCs may disburse the loans as per the payment stages prescribed by such authorities. This could be done even where payments sought from house buyers are not linked to the stages of construction, provided such authorities have no past history of non-completion of projects.

NHB added that HFCs should 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 warned that merely obtaining borrower consent and release of funds by the company without linkage to the stage of construction will be seen as dereliction of duty of the HFC.

In common parlance what this means is that the builders can no longer pay the EMIs for the buyers. This had become a huge selling point with realty sector where builders advertised how a buyer’s EMI would be taken care by the builder till completion of the project.  The usual scheme was where developers were allowing buyers to book flats with only 5% payment, and balance on delivery by undertaking to repay the EMIs. Undoubtedly, this was one of the most important schemes used by developers to induce purchase by homebuyers for under-construction properties.

This it is a huge negative for the already reeling realty sector, little wonder then that for the past two days the sector has been in the red and even today, the BSE Realty is down 2% with 8 out of the 10 covered in this index in the red.

This ‘advise’ of NHB means that the interest cost of the buyer will go up bringing to naught the RBI’s spree of rate cuts. This in turn is going to further aggravate the sector. The NHB is obviously doing this to cull the frauds by builders, cheating banks of money while promising the sky to the buyer.

The impact is sure to be felt as approximately 10-12% of the home loan market in top-8 cities were subvention schemes. Not to mention that the entire financial planning of the builders will now go for a toss. Even many buyers, living in rented accommodation made use of this scheme to book a flat; now that entire segment will disappear. Also those who were in the process of buying a house through will scheme will now have to wait and this scheme is put into hold with immediate effect.

The loophole here – those in the sector say that this scheme has been stopped by the NHB with no similar circular coming from the RBI. This means if a person has a loan from a bank, the scheme will continue.

The good pointers of the stoppage of this scheme is that henceforth, when a developer defaults, it will not impact the buyer and the developer will now be forced to concentrate on execution. One BIG silver lining – the builder was as such building in the cost of subvention in the price of the apartment; the removal of the scheme means you can negotiate the price lower.

All said and done, there is bound to be some immediate short term pressure on the realty sector but in the long term, this is a good move as the entire focus will be on completing projects – buyers will simply not go for any under construction projects.

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