MUMBAI: The liquidity squeeze in the real estate sector is expected to deepen further with the National Housing Bank’s latest directive to home finance companies (HFCs) asking them to desist from offering loan products involving debt servicing by developers on behalf of borrowers.
The directive is expected to limit the sales velocity builders have been achieving through interest subvention schemes such as ‘5:95’ and ‘10:90’. Under these schemes, homebuyers make the down payment for the property (5% or 10%, for instance), while developers assume responsibility for paying the loan interest until completion of the project.
This arrangement eased the home buyers’ liability for the stipulated period, ensured sales for builders and project funding through financial institutions. However, the new directive will halt such offers, impacting sales and financing. NHB had issued an advisory on these schemes earlier too, in 2013. Buyers who have opted for such schemes earlier will have to shift to construction-linked payment plans.
The NHB cited the prevalence of fraud in such subvention schemes as the reason for its latest move, adding that home finance companies should disburse loan payments to the developer based on construction status.
‘Focus on Project Execution’
It didn’t elaborate on the nature of the scam involved.
“In the aspect where it seeks to control frauds, it is obviously welcome, although the side effect will be further drying up of project funds,” said Niranjan Hiranandani, president (national) of the National Real Estate Development Council (Naredco) lobby group. “While fraud in such schemes definitely needs to be controlled, the need for alternate funding options is what resulted in subvention schemes being aggressively positioned.”
According to Hiranandani, the industry hopes that alternate funding sources are made available at the earliest.
The move is expected to put further strain on the already precarious liquidity situation of many developers, albeit indirectly. In order to attract more buyers and raise funds for construction, many builders had resorted to offering various subvention schemes.