The subvention squeeze

Geetu Vaid

The circular issued by the National Housing Bank last week cautioning housing finance companies (HFCs) to “desist” from offering loans under subvention schemes has set the cat among pigeons in the realty sector. Not only did this circular trigger debates and comments among the stakeholders all through the week, it also put a questionmark on the market’s performance in the festive season in 2019. 

In a market battling slow sales, developers grapppling financial crunch and buyers with a shaky confidence, the NHB directive to HFCs, in spite of its positive intent, has created apprehension of an increased interest cost for homebuyers and aggravated liquidity crunch for developers.    

The directive

• The circular mentions that housing loans should be offered strictly linked to different stages of construction and no upfront disbursal should be made in case of incomplete projects.
• For housing projects sponsored by government bodies, HFCs may disburse housing loans according to payment stages prescribed by authorities, provided such authorities have no past history of non-completion of projects.

Festive season impact

The impact on the festive season performance of the sector will be negligible as most of the buyers are looking for only completed and ready-to-move-in properties where the subvention plans apply. 

The trigger

The NHB directive is a move to bring transparency and to plug loopholes for malpractices in the sector. It came in the wake of multiple complaints of builders backing out of their commitment of paying the EMIs of home loans disbursed to buyers after ‘pocketing’ the money from HFCs. Subvention schemes that come in different variants basically involve an arrangement under which the builder promises to pay the loan EMI of a buyer till the time possession is handed over so that the buyer doesn’t have to bear the double burden of paying rent as well as the EMI. These schemes are generally offered as festive offers each year and are used as a tool by developers to increase sales. The developers get funds at cheaper rates through this route as home loan interest rates are much lower than the interest rates charged from builders from financiers. So, with clouds of liquidity crunch looming large over the sector, subvention schemes were propagated as a win-win formula for the buyers as well as developers. The popularity of these schemes can be gauged by the fact that about 10 to 12 per cent of home loan market in top-8 cities is under subvention schemes.

But the NHB directive is going to alter this equation. It stipulates 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. 

Gauging reactions

The reaction to the move, however, has been varied. According to Anshuman Magazine, Chairman & CEO- India, CBRE, “The move has come in the wake of the Budget announcement that the NHB and Non-Banking Finance Companies will now be regulated by the RBI. The move towards construction-linked schemes is likely to help the residential segment become more organised and transparent , which is expected to boost investor sentiment”. Maintaining the same tangent E. Jayashree Kurup, Head, Content and Advisory, Magicbricks, says,” The subvention scheme, when it was launched, was ray of hope for home buyers. But a certain part of the developer community didn’t fulfil its obligation for various reasons and this step was the need of the hour.” 

Supporting the move Nikhil Hawelia, MD, Hawelia Group, comments that due to the recent ILFS crisis, the housing finance companies have actually been on the backfoot for the past four quarters with regard to subvention schemes, so there will not be a huge impact on the sector. As a builder not in favour of offering subvention route to buyers, Nikhil sees this move a great leveler that will bring all developers on the same platform now besides checking speculation in the market — both of which are positive for the realty market on the whole. 

On the other end of the spectrum is  Parth Mehta, MD, Paradigm Realty, who says, “This step will definitely hamper the sales cycle of  developers as it will be difficult for buyers to solicit eligibility from limited banks offering the same on under-construction projects”.

Calling drying up of a source of funding as main side effect of this move,  Rajiv Gupta, CEO, Wave Infratech, says, “ The sector had just started to move towards a revival, but with this move the developers and homebuyers will feel the financial strain. Given the current state of the sector, this decision might further tighten the already strained liquidity situation.”

Terming it as a regressive move Anupam Gupta, Sales and Marketing Director, GBP Group, expressed apprehension of a 20 to 25 per cent drop in sales in the coming months. “While an average salaried class buyer will be forced to defer his purchase decision, there is also no guarantee that project deliveries will be in time in the absence of these schemes”. According to him the negative impact on sales will actually lead to a slower delivery rate. 

Suggestions

The industry is desperately looking for help and support from the government in terms of a solution to the liquidity crunch. Prateek Mittal, Executive Director, Sushma Group says, “Putting a blanket ban on the scheme is not the solution. The real problem is with accelerated payment plans, and the  authorities concerned must find ways to keep such things in check. Subvention is one of the sturdy attractions along with PMAY and CLSS, which will help the government achieve its mission of Housing for All”. Seeking governemnt help in opening alternate funding sources Niranjan Hiranandani, President, National Real Estate Development Council (NAREDCO), says, “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.  The industry hopes that alternate funding sources are made available at the earliest”. 

“Regulation should be there on the builders. If a builder defaults on payment of interest then he should be penalised rather than stopping the scheme altogether”, suggests Gupta. 

“There is need to rationalise payment plans and increase transparency. Even in construction-linked plans 90 per cent of the money is taken for structure-linked construction and very less for the finishing stage. As a result most of the projects are stuck at the finishing stage, ” says Nikhil.

CREDAI is already preparing a representation to meet the government bodies. “We are hopeful that a solution that serves both the purposes will be found soon”, adds Mittal.