RBI Decision on 80:20 Scheme May Hit Hard the Builder-Investor Nexus
A decision by Mr. D. Subbarao, the former governor of Reserve Bank of Indian (RBI), to curb on 80:20 schemes could hit the builder-investor nexus that has contributed for nearly 50% of the sale transaction in the last one year. To protect the homebuyers and the lender, The RBI has asked banks to link home loans to the stages of construction of a project instead of upfront disbursal of approved home loan to builders. This construction-linked payment plan (CLP) requires the homebuyer to pay the installments to the builder on a predetermined rate of progress of the project.
This decision by the RBI is a big blow to the developers and builders who were dependent on this 80:20 schemes to boost their sales and raise some money even when the demand is low.
How developers are benefited by 80:20 scheme
In 80:20 scheme, homebuyers have to pay 20% of the purchase price initially and the balance on the possession of the property irrespective f the time frame. As per the scheme, buyer needs to pay EMI for two years. For example, if the flat is worth Rs. 1crore, buyer will have to pay Rs. 30 lakh. If an under construction flat is booked under 80:20 scheme, the buyer do not have to pay any pre-EMIs. In this case, the builder agrees to pay interest on the behalf of borrower till a specific period and the bank disburses the complete loan amount to the builder. However, the loan application will be in the buyer’s name. This kind of scheme is benefitable to the builders as the builders get loan at a cheaper rate and at a time when they are in need of funds for construction.
The builder were dependent on this scheme as builders were facing lower demand and sales as the property prices were sky rocketed, homebuyers stayed away from real estate. This resulted in high inventory and it had to be liquidated to raise funds. As per a report by Knight Frank, in the march quarter the piled up inventory was so much, that it would take at least seven quarters to sell them off and the schemes like 80:20 surely helped the builder to sell most of the stock by June quarter. In 2012, at least 100 projects were launched in Mumbai under 80:20 scheme. Mr. Pankaj...