The RBI has barred banks from giving upfront loans for under-construction projects through schemes like 80:20. Providing such loans help a bank as they are classified as mortgage and not construction finance which is considered a risky business by the RBI and requires higher provisioning. The builder too gains as home loans are far cheaper than construction loans.
According to bank sources, nearly 25% of loan disbursements for new flats in Mumbai are under such schemes. While builders said the RBI's move would hit economic growth, HDFC chairman Deepak Parekh had recently spoken out against such schemes. "As a basic tenet, construction finance entails higher risks and, therefore, such risks have to be built into the pricing. Construction finance should not, through any innovative structuring, be available to developers at the rate of interest being offered on individual home loans Further, to pay upfront construction finance to developers even before the ground is broken is dangerous," Parekh warned.
Some feel the RBI's decision will bring down prices. "It is a good decision as the government has sought to warn buyers who are tempted by the attractive 80:20 scheme, thinking they are getting a good discount. In reality, this scheme is quite complicated and does not clarify how much discount the developer is giving the buyer. The RBI's decision will force developers and banks to be more transparent in explaining the benefits of the scheme to buyers. It will force developers to give a prospective buyer a discount upfront instead of spreading it across 2 to 3 years as in the 80:20 scheme," said Sanjay Dutt, executive managing director at global property consultants Cushman and Wakefield. But builders are greatly upset by the move. "It's ironic that the government believes the middleclass, which avails of loans to buy its dream home, to be a risk, but not the five major industrial houses who, between them, have an exposure of Rs 5 lakh crore of public money. The RBI obviously thinks it is extremely important for it to stifle the economic growth of a company by taking such decisions," said Vimal Shah, managing director of Hubtown and president of the Maharashtra Chamber of Housing Industry. He also questioned the need for RBI governor D Subbarao to take the decision on his last day in office.