NHB’s Move On Interest Subvention May Weed Out “Investors” From Real Estate Sector

The circular issued by the National Housing Bank (NHB), the regulator for the Housing Finance sector, has evoked sharp reactions from builders & Developers community while its content has been welcomed from the consumer (home buyers) point of view by the industry. The move by NHB will prove to be a serious blow for the “investor” community in the real estate sector. 

NHB advised housing financiers to stay away from funding interest subvention schemes in which developers offer to service interest on housing loans on behalf of borrowers. NHB said it has received several complaints and representations citing the prevalence of fraud in such schemes offered by the Housing Finance Companies (HFCs).

“Several complaints have been received in relation to the aforementioned housing loan products. Further, instances of frauds having been allegedly committed by certain builders using subvention schemes have also been brought to the notice”, the NHB circular said.

Farshid Cooper, MD, Spenta Corporation said, “The NHB holding down on interest subvention schemes offered by developers surely will help in the crackdown on the misuse of the scheme as there are a number of frauds which have been reported. However, developers who use the funds strictly for the projects concerned could be impacted by this move”. Spenta Corporation is a mumbai-based real estate developer.

Rahul Grover, President-Sales & Operations, Sai Estate Consultant Chembur Pvt Ltd (SECCPL) said, “As subvention schemes expose homebuyers who take the loan to protect against additional risk in the event of a default by the builder or non-completion of the project on time, having HFCs to desist from offering subvention loans will reduce the risk of losing their hard-earned savings. This move will also aid purchases of homes by genuine homebuyers and weed out investors from the market”.

However, Cooper said, NHB asking HFCs to desist from offering such schemes will prove to be a major setback for consumers looking to acquire homes especially for the first time buyers, as the scheme provided equated monthly installment (EMI) holiday scheme and also reduced consumer’s interest payment burden for the construction period.

“In the absence of the scheme, the transaction volumes may come down across all market segments including affordable housing sector where such schemes were extremely popular with consumers as well as developers. This will have an overall impact on the real estate sector that is eagerly looking for changes in policy framework to spruce up business,” Cooper said. 

On the other hand, Grover said, “Over the past few years, subvention schemes have only been implemented as a marketing gimmick, however, the consumers will make a much-informed decision henceforth in a slightly safer environment, if they choose not to go for a subvention scheme”. 

To protect home buyers, the NHB, in the circular on subvention schemes offered by builders, said the disbursal of housing loans should be strictly linked to the stages of construction and no upfront disbursal should be made in incomplete projects or those under construction. 

The NHB said prevalent products of HFCs, if any, should be reviewed on the above lines. The directive, it said, shall be effective even when the financier is yet to commence disbursements under the sanctioned cases.

Some popular subvention schemes currently in circulation include the “5:95” and “10:90” schemes, in which buyers make the down payment for the property, with developers servicing loan repayments until project completion. They are usually offered in projects being developed in metropolitan regions, including Mumbai.