Builders oppose RBI's remark on teaser home loans

Developers are worried over the recent Reserve Bank of India’s observation that teaser housing loans offered by banks and financial institutions under 20:80 or 25:75 schemes will eventually affect the ‘credit history’ of the borrowers if the builders fail to pay or delay the pre-EMIs or interest (on behalf of the borrower to the bank till completion of project) as agreed in the tripartite agreement signed between banks, builders and borrowers.

The apex bank has also warned the banks that they would expose to higher non-performing assets (NPAs) in case of defaults by the builders, who are facing acute credit crunch, and possible diversion of funds by financial institutions.

Builders after entering into an agreement with certain banks are offering such teaser loans to homebuyers. Though this is good for banks, as they can disburse more loans and for builders, as they will get more cash flow for their projects, RBI wants that the lenders should wary of financial implications in case of delay or default by the builders, which will ultimately become a blot on the credit worthiness of the buyers.

The buyers may not get loans in future as banks usually check the loan applicants’ credit-worthiness before offering housing loans. 

The recent RBI’s observation would make the banks to withdraw such schemes or or selective on builders, and buyers may not opt for such teaser loans fearing that incase of default by builders, their credit history would go for a toss.

Slamming the Apex banker’s comment as a blow to the real estate sector, Kishor Pate, chief managing director of Amit Enterprises Housing, said, “RBI's latest suggested guideline to lending institutions with regards to the 20:80 and related schemes can prove to be yet another blow to the residential real estate. 

Many developers have been banking on funds generated by these schemes to complete and deliver their projects. This comes at a time when construction costs have risen and the cost of funding is crippling, so it is unlikely that this will lead to a reduction in prices. Nevertheless, such moves are definitely setbacks for the industry as a whole. Established developers with the capacity to complete projects on the basis of their own resources and traditional funding will still be able to honour their commitments to their customers. But the shakeup that the industry is experiencing now is going to make it very hard for new entrants to gain a foothold.

While commenting on RBI’s observation on teaser loans and stricture to banks, Anil Pharande, Chairman - Pharande Spaces & Vice President - CREDAI (Pune Metro), said, “Builders who had been relying on this scheme to generate project funding will be hit hard if banks abolish it. Since this would effectively raise the cost of project capitalization even higher, there is no question of a correction in prices as a result of this move.

“We can only hope that the reverse does not become a reality instead. Residential property prices in the PCMC are generally more affordable than in the PMC region and demand is healthy, so builders who are adequately capitalized will not be affected. In the peripheral regions of PCMC, many developers have already marked down their prices to generate demand, and it is not likely that we will see a further correction there.”

However, it is really unfortunate that such moves are made just before the festive season, during which builders are expecting increased demand, Anil further said.

     

Reacting sharply on the issue, Shobhit Agarwal, Managing Director of Capital Markets, Jones Lang LaSalle India, the leading real estate research firm, said, “RBI’s move is aimed at protecting the interest of buyers who are not informed or aware of the long-term financial implications of such and similar schemes, if defaults occur from builders. This will surely increase the transparency of housing loans and increase the awareness among the homebuyers and at the same time protect funding institutions.”

Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefied said, "RBI’s caution on innovative housing loan schemes, such as 80:20 or 75:25 that allow upfront disbursement of the complete payments in under-construction projects is expected to slow down the current ongoing sales. The RBI has acted responsibly by introducing this directive as it is trying to protect the interests of buyers and lending banks in these kinds of sales. 

"However, the impact would be short term and sales volumes would pick up once the real estate market witness other promotional schemes or correction of prices which would eventually help sales till such time overall economic scenario improves. Mumbai and NCR and some select micro markets across other major locations, are the markets that are expected to see the impact of this directive as this trend was becoming very popular in these markets to attract sales.”