RBI Decision on 80:20 Scheme May Hit Hard the Builder-Invest

1. RBI Decision on 80:20 Scheme May Hit Hard the Builder-Investor Nexus

2. A decision taken 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 was low. Sulekha Property is among the Top 3 property portals in India, offering more than 1 lakh properties. For more on project launches, upcoming projects, price trends, visit http://www.property.sulekha.com/

3. 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 of 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, in the bank records, the loan application will be in the buyer’s name. • This kind of scheme is benefitableto the builders as the builders get loan at a cheaper rate and at a time when they are in need of funds for construction. Sulekha Property is among the Top 3 property portals in India, offering more than 1 lakh properties. For more on project launches, upcoming projects, price trends, visit http://www.property.sulekha.com/

4. The builders were dependent on this scheme as builders were facing lower demand and sales. • The homebuyers stayed away from real estate as property prices were sky rocketed; resulting in high inventory and it had to be liquidated to raise funds. • As per a report by Knight Frank, in the march this year, 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. PankajKapoor, Managing Director of LiasasForas states that such schemes were launched as a financial product to bridge the gap between affordability and artificially inflated prices, he further says that if there are no buyers, the builders have to bring such kind of schemes to provide discount to buyers. Sulekha Property is among the Top 3 property portals in India, offering more than 1 lakh properties. For more on project launches, upcoming projects, price trends, visit http://www.property.sulekha.com/

5. 80:20 scheme – Disadvantage to buyers • This scheme is extremely risky for the buyers as it is offered only during the initial construction stage. • If the developer defaults the payment to the lender, the liability falls on the end-user as the bank loan is in his name. • Generally, the developers use the money disbursed to fund another land or for another project instead of using the money for completion of construction. • It was a win-win situation for the builder but the end user would be in risk if the project was delayed due to some reasons. In the end, if the developer delays payment of interest, it is homebuyer whose credit scores are harmed as the loan is in his name. 80:20 scheme curb – Impact on builders • The realtors are not happy by the RBI’s move. The 80:20 scheme was doing good for the real estate industry and the customers and now after this decision, it will have a huge impact on sales as well. Sulekha Property is among the Top 3 property portals in India, offering more than 1 lakh properties. For more on project launches, upcoming projects, price trends, visit http://www.property.sulekha.com/

6. He furthers added that such schemes comprise just 5% of sales and 20 % of cash flows and it will surely be disadvantageous for the builders. Construction-linked payment plan (CLP), how does it help homebuyers and lenders • This move by RBI will protect the interest of the homebuyers by making the property market more transparent and will also protect the banks that provide funding in it. • Now with this new scheme in place, the builder will be enormous pressure to cut down the prices. • The Chief Executive of DTZ India, Mr. Anshul Jain is all praise for RBI decision; he says that RBI has done a very good job to avert the collapse of the financial institutions. • The RBI has taken a strict decision to protect the interest of buyers from the artificially inflated property prices keeping in mind the real estate market bubble. Sulekha Property is among the Top 3 property portals in India, offering more than 1 lakh properties. For more on project launches, upcoming projects, price trends, visit http://www.property.sulekha.com/