Subvention schemes: The hidden risks for buyers and the market


Subvention schemes may offer a convenient way for home buyers to finance their purchase but it also exposes the buyer, as well as the financing company, to certain risks

Under subvention schemes, a buyer can have a house, by paying as low as 5% of the property’s value and not bear the burden of EMIs till s/he gets possession of the house. However, this financing format, which supposedly helps the home buyers and eases the developers’ funding woes, has hidden dangers that many first-time home buyers fail to spot.

In 2007, Anuradha Aggrawal, an IT professional, booked an apartment by paying only 10% of its cost, through a subvention scheme. To her, it seemed like an ideal way to buy a house, without having to simultaneously pay rent, as well as the EMI. However, within the next five years, her dreams came crashing down, as she realised the trap that the developer had smartly laid, around the subvention scheme. “The project is nowhere near completion. Worse still, it has spoilt my credit history. Today, I neither have a house, nor can I apply for further loans. I need money for my future studies but no bank is willing to lend to me now,” she laments.

Win-win for developers and buyers?

Subvention schemes, also known as 20:80 schemes, were supposed to create a win-win situation for buyers, as well as developers. Several developers, with or without proven timely execution capabilities, adopted such schemes, to tide over the slowdown in the market and woo prospective buyers. It soon emerged as a popular marketing tool, as buyers paid only 5% to 20% upfront, while the outstanding amount would be paid at the time of taking possession.

In due course, developers started erring and projects were delayed, owing to the absence of any regulatory framework, as well as the lending agencies’ lack of control over the developers. Some builders even diverted the funds to purchase more land. The Reserve Bank of India (RBI) soon realised, that banks and borrowers were both exposed to lending and credit risk. The RBI’s concerns were quite valid, from the home buyer’s perspective, as these loans were on the books of buyers and not on developers, thereby, making them risky. Nevertheless, non-banking financial companies (NBFCs) continued to offer the scheme, with various developers overtly advertising it.

Nikhil Hawelia, MD of the Hawelia Group, puts the onus on the banks, saying that it is the responsibility of the lending agency, to ensure due diligence. According to him, subvention schemes must have stringent eligibility criteria. “The moment there is a system to evaluate the developers’ credibility, subvention schemes will not be harmful for home buyers. I am neither in favour of subvention schemes being stopped, nor in favour of it being rolled out to one and all,” maintains Hawelia.

Independent financial analysts however, maintain that subvention schemes pose a big risk for banks. There is practically no safeguard, in case the developer fails to deliver the project. Moreover, if the project is not completed, the bank can’t seize the property, even if the borrower defaults on payments. Consequently, it increases the exposure of banks to non-performing assets. With subvention schemes still being offered, the moot question that remains is whether these schemes affect the credibility of real estate.

(The writer is CEO, Track2Realty)

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