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The largest bank of the country, State Bank of India (SBI) has announced a scheme to provide relief to its customers, in the form of a guarantee for the timely completion of the project and possession of the house.
Historical background and need for a guarantee scheme
In the past, home buyers have often been at the mercy of developers, with developers largely failing to adhere to the promised date of possession. After many real estate projects stalled across the country, investors became sceptical and avoided under-construction properties, till the Real Estate (Regulation and Development) Act (RERA) came into force.
As the RERA requires builders to give the exact date by which the project will be completed and the unit’s possession handed over to the buyer, the risk of abnormal delays in getting possession have come down significantly. Nevertheless, the risk cannot be fully ruled out. The delay in completion of a project can, sometimes, be due to circumstances beyond the control of the developer and therefore, the buyer still has to accept some risk about getting timely possession of the flat.
In a majority of the cases, residential houses are purchased by individuals with the help of home loans. In case the possession of the house is not received by the promised date, the buyer has to face a double whammy – on one hand, the buyer may have to pay for his stay in the rented house and on the other hand, he has to continue to service the EMIs of the home loan.
The ‘Residential Builder Finance with Buyer Guarantee’ scheme explained
In order to provide relief to the buyers of under-construction properties, the SBI has announced a novel guarantee scheme called ‘Residential Builder Finance with Buyer Guarantee’ (RBBG). Under this scheme, SBI will guarantee the home loan borrower the date of possession promised by the developer. If the developer fails to complete the construction and obtain the occupancy certificate of the project by the specified date, the bank will refund full amount including the margin money paid to the borrower. The specified date for reference, is the date submitted while registering the project under RERA.
However, not all projects are required to be registered under the RERA. A project is required to be registered under RERA, if the area to be developed is more than 500 sq metres and has more than eight units in the project. So a project has to be registered under RERA, if it crosses any of the two threshold limits.
So, you will not be able to avail of the benefit under this scheme, if the project is not required to be registered under RERA. The scheme is available for residential units only and not for the purchase of any commercial property. Moreover, there is a threshold upper limit of Rs 2.50 crores, as the cost of the house for which the scheme will operate. This guarantee will be available only for selected projects, where there is an agreement between SBI and the developer. As per the initial information available, the scheme will be available in seven cities initially and may be extended later on, to cover more cities.
This scheme has a dual purpose. It aims to attract home buyers, to avail of home loans from SBI for eligible projects. The scheme also provides a facility for developers to avail of a loan for the project from the SBI of between Rs 50 crores to Rs 400 crores, subject to the fulfilment of certain conditions, as well as good CIBIL score.
For providing the guarantee, the bank will obviously collect some guarantee fee, as the bank is taking the risk of having to pay the buyer’s investment, in case of default by the developer. The finer details of the scheme are not available in the public domain, as of now.
Advantages of SBI’s guaranteed possession scheme for real estate
After burning their fingers, many real estate investors have started avoiding under-construction properties and prefer buying ready-to-move-in properties. As buyers have not been coming forward to book flats in under-construction projects, the inflow of funds for developers has dried out and thus, further aggravated the situation for developers.
Under these circumstances, SBI’s scheme provides a win-win situation for all three parties.
- As the scheme proposes to guarantee the home buyer’s investment for the residential house, the buyer gets the confidence to make the investment.
- In case of such projects, SBI would be the lender to the developer in most cases and the project/property would have been subject to a charge created in favour of the bank. So, it would be easy for SBI to acquire the rights over the property for which the guarantee has devolved and the bank has paid the borrower.
- Finally, for the developer and the real estate industry, in addition to providing the funding to the developer, the real estate sector may also get major boost due to enhanced confidence of the home buyers and if other lenders follow suit and come out with similar schemes.
(The author is a tax and investment expert, with 35 years’ experience)