Homebuyers alert! Builders banned from paying homebuyers EMI by National Housing Bank

In a move that will impact project finance in the scenario where liquidity crunch is being acutely felt, the National Housing Bank (NHB) has advised housing financiers to stop funding schemes in which developers offer to service interest on housing loans on behalf of borrowers. The NHB is of the opinion that it would contain fraudulent activities taking place against the homebuyers in the name of subvention schemes, real estate developers have demanded alternative liquidity support as the NHB move may hit the under-construction projects.

Speaking on the matter Dr. Niranjan Hiranandani, National President, National Real Estate Development Council (NAREDCO) said, "The NHB cited the prevalence of fraud in such subvention schemes as the reason, adding that home finance companies should disburse home loan payments to the developer based on the status of construction. In the aspect where it seeks to control frauds, it is obviously welcome, although the side effect will be further drying up of project funds. While fraud in such schemes definitely needs to be controlled, the need for alternative funding options is what resulted in subvention schemes being aggressively positioned." Dr. Hiranandani said that the industry hopes that alternate funding sources are made available at the earliest.

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Parth Mehta, Managing Director, Paradigm Realty said, "With the recent regulation issued by NHB to all registered HFCs of refraining from any funding linked with subvention schemes curated for under-construction projects of developers is another detrimental news for real estate industry. Generally, the affordable segment of houses of less than one crore rupees is paired with subvention schemes from HFCs & Banks by developers to make it easier for first time home buyers to manage their monthly expenditures on rent only, instead of the double burden of rent as well as EMI of an under-construction property. In subvention, the developer pays the interest cost to possession and only post possession the buyer has to start paying EMI. This mechanism gives buyers a trust factor in the developer as the minimum amount is to be paid as a down payment plus ability to buy their first home without a monthly hit of EMI till possession. The directive is clearly for HFCs who were active in subvention schemes and not for banks. However, it will definitely hamper the sales cycle of reals estate developers as it will be difficult for buyers to solicit eligibility from limited banks offering the same on under-construction projects.”