‘Don’t give loans for 80:20 schemes’
“As a basic tenet, construction finance entails higher risks and, therefore, such risks have to be built into the pricing. Construction finance should not, through any innovative structuring, be available to developers at the rate of interest being offered on individual home loans. Further, to pay construction finance upfront to developers even before the ground is broken is dangerous,” Parekh had warned.
This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the longterm financial implications of such schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector, and also to protect the financial institutions that provide funding in it, says Shobhit In an 80:20 scheme, the buyer initially pays 20% of the purchase price upfront and the balance on possession
There’s no pre-EMI and the builder agrees to pay interest on the borrowers’ behalf for a specific period while the bank disburses the entire loan amount to the builder
The loan remains in the name of the buyer. The builders get construction finance at a cheaper rate and under the head of a residential loan through the buyer. If the realtor defaults, the liability falls on the consumer since the bank loan is in his name. The problem stems from the fact that the schemes entail a tripartite agreement between the bank, the builder and the buyer of the housing unit.
Builders generally resort to such schemes when demand is low and sales are slow. Banks can be saddled with disproportionately higher exposures with the concomitant risk of diversion of funds.