Warning bell: RBI red flags 20:80 home loan schemes
Real estate companies have been offering schemes called 20:80 and 25:75 where the builder agrees to pay interest on the borrower's loan for a specific period
Sep 04, 2013
Source : The Economic Times


MUMBAI: The Reserve Bank of India (RBI) wants banks and home buyers to be wary of the so-called '20:80, 25:75' schemes as a default by the builders could affect the credit profile of the borrower and expose the banks to higher NPAs and possible diversion of funds. Real estate companies have been offering schemes called 20:80 and 25:75 where the builder agrees to pay interest on the borrower's loan for a specific period.

The buyer pays 20% upfront and the bank disburses the entire loan to the builder through the individual. The builder finances the construction of the project with the money, and agrees to pay interest on behalf of the borrower to the bank. Banks such as ICICI BankBSE 1.20 % and Axis BankBSE 1.02 % have been lending under these schemes in the hope of increasing the pace of home loan disbursement.

The country's oldest mortgage lender, Housing Development Finance CorporationBSE 0.31 % also runs these schemes with select builders though its chairman Deepak Parekh warned against such schemes in his letter to shareholders this year. "This will have a negative impact on property developers' cash flows as these financing schemes were allowing them to improve sales volume," said Ramesh Nair, COO at property consultancy Jones Lang La-Salle. Nair said that interest rates are already heading northwards, and that realtors' access to liquidity is drying up.

The RBI's stipulated 5% exposure limit for commercial real estate sector has been reached by many lenders, he added. In a late evening release on Tuesday, the central bank warned that any delay in payment by the builder under schemes would reflect poorly on the borrowers' credit bureau report — something which lenders rely on to check an individual's credit history prior to lending. "Any delayed payments by developers/builders on behalf of individual borrowers to banks may lead to lower credit rating/scoring of such borrowers by credit information companies as information about servicing of loans gets passed on to the CICs on a regular basis,'' the central bank said.

"In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders/developers without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds,'' it added. RBI's warning has increased hopes of a fall in sky-high real estate prices due to the builders' inability to hold on to higher rates.

Real estate prices in cities like Mumbai have continued to remain high despite a sharp slowdown in economic growth, rising interest rates and the prospect of job losses. "To my mind, teaser products, of any nature entail risks. Customers need to be cautious of 'too-good-to-betrue' type of products. Borrowers must not be blinkered into believing that there are no risks when developers offer to pay interest on a borrower's loan for a specified period," Parekh wrote in his June letter to shareholders.

"Borrowers have to be cautious because in the event of a developer delaying payment, the credit bureau reports will reflect this in the borrower's records, thereby impacting his or her creditworthiness," he wrote.

In the past, RBI had cracked down on the dual-rate scheme -- fixed and floating -- by increasing the provisioning requirement, forcing banks to withdraw these schemes. "With this move, the central bank has tried to crack down on banks. Banks have been categorising these loans as retail loans while 80% of the loans are being serviced by developers. This gives banks benefits on loan classification and capital allocation which would otherwise have to be classified as real estate exposure,'' said the retail head of a private sector bank.

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