No More Home Loans Under Subvention Schemes As NHB Restricts Finance Companies
“Pay nothing for 3 years”
“All you need to pay is the booking cost”
“Home loans at 0%”
You are probably familiar with such offers. We read about such “Subvention Schemes” on hoardings and advertisements every day. However, now the National Housing Bank (NHB) has asked housing finance companies (HFCs) to "desist" from offering loans under subvention scheme wherein real estate builders pay pre-EMIs on behalf of home buyers. The direction has been issued by the NHB after receiving several complaints of frauds committed by certain builders in the name of subvention schemes. Citing its earlier order in 2016, the NHB said that disbursal of housing loans by HFCs should be strictly linked to the stages of construction and no upfront disbursal should be made in case of incomplete/un-constructed projects. NHB has also warned HFCs that merely obtaining a borrower's consent and release of funds by the company without linkage to the stage of construction will be seen as dereliction of duty.
NHB also said that HFCs should have in place a well-defined mechanism for monitoring of the progress of construction of housing projects and obtaining consent of the home loan borrower prior to release of payments to the developer.
MakaanIQ tells you more about home loans under Subvention Schemes.
What does a 'subvention scheme' Home Loan mean?
It is a form of bank financing from a home loan point of view. When you take a home loan for an under-construction property, you pay Pre-EMIs until your flat is delivered. Under subvention scheme home loans, you need not pay the Pre-EMIs until a fixed period, or until the flat is delivered. The developer pays interest to the bank during this period.
For all practical purposes, the bank does not have any role in the Equated Monthly Instalment (EMI) sharing scheme. The bank finances your home loan according to the cost of your flat. The bank disburses up to 80 per cent of the market value of the property, but not to the home loan applicant. The money goes to the developers who pays the interest (Or Pre-EMI) on behalf of the applicant for a certain period under the subvention scheme. The developer, however, does not repay the principal amount.
How do banks fund developers?
Majority of banks fund reputed builders whose projects are approved by the bank under APF (Approved Project Finance). The Indian financing companies involved in housing and related developments provide an APF number or a code to developers in order to authorise them to build a project.
An APF number is a good indicator. If the developer does not have an APF number or a code, this means that the project is not registered or that it lacks approval/ permit of an authorised agency.
Is more documentation needed for subvention schemes?
- A Memorandum of Understanding (MoU) has to be executed between the Developer and the Bank
- Tripartite Agreement (TPT) must be executed between the developer, bank and the respective home loan applicant
- The specific clauses pertaining to the subvention scheme is incorporated in the home loan sanction letter
Subvention schemes are a win-win situation for all parties
How the developer benefits
- Projects launched under subvention schemes attract customers in large numbers
- Developers benefit by getting the 20 per cent payment upfront from home loan applicants and 80 per cent of the funds from banks, depending on the stage of construction
- Home loan interest rates that developers pay to bankers are much lower than commercial/ corporate funding rates
How the bank benefits
- The bank finds large numbers of home loan applicants from one approved project
- The approved developer refers customers to the bank
- Banks find this cost-efficient, because the credit appraisal process of an approved project does not require “legal and technical” verifications
- More home loan approvals in lesser time
Benefits to the borrower
- Subvention schemes work best for the applicants who have cash/liquidity constraints
- Many subvention schemes include only the 'initial booking cost', which is lesser than 20 per cent of the market value (i.e. margin money) of the property.
- No Pre-EMI or interest payment till possession
- No Pre-EMI till possession helps you plan your budget till the property is ready-to-move-in
- Developers ensure that the flat is delivered to you on time, to lower their own interest burden.