Status on- 22/06/2023
INTRODUCTION
Subvention schemes and buyback schemes are only two examples of the many new financial schemes that have appeared on the market in recent years. There have been accusations of harassment and fraudulent practices in connection with implementing these programs, despite the attractive benefits they promise consumers. This article delves into the specifics of subvention schemes, brings to light incidents of harassment, and analyses how fraud continues to exist in the market despite regulatory interventions such as the NHB decision to end subvention schemes.
How does Subvention Scheme work?
The developer, the buyer, and the banker all sign an agreement which is called a tripartite agreement. Customers are responsible for paying a booking fee of 5-20% of the total price, with the remaining balance being provided by the bank in the form of a loan.
The most important feature of such subvention schemes is that the developer pays the interest and the lenders release the loan to the developer dependent on the construction’s progress. The builder will cover the interest payments until the home buyer takes possession, or for the agreed-upon time period.
Subvention Scheme Boon or Curse
From a purely theoretical perspective, the buyer, the builder, and the bank would all come out on top in this transaction. However, in real life, consumers are more likely to be the ones affected by fraud, as the bank received the monies to continue servicing home loan portfolios and the developer received the funding to finish the projects at a retail rather than commercial rate. There must be faith on both sides that they will fulfil their obligations. Others (Buyers) have chosen bank loans on the assumption that the banks will perform adequate due diligence and verify that the developers can, in fact, afford the EMIs and construct the properties as promised. When the developer failed to pay the EMI till possession which was earlier promised to the bank then the concerned bank has gone after the buyer in whose name the loan was disbursed.
NHB Intervention:
Before 2013, the NHB allowed banks to pay the full loan amount to developers up ahead when disbursing housing loans under subvention schemes, but this practice was outlawed.
The National Housing Bank has asked housing corporations to stop making subvention loans. The liquidity of real estate developers is projected to be further constrained by the NHB’s action.
Apartments were in high demand on the speculative market as a result of the subvention program, but the building’s true market value did not become apparent until after construction was finished. There are, in fact, a small number of developers who have artificially inflated the prices of apartments offered through the subvention system by an amount greater than the interest actually absorbed by those developers. It boosted profits while giving the impression of higher demand than actually existed. As a result, a builder experienced a massive debt bubble, which the RBI should have been responsible for preventing. Since the NHB was the regulator, yet it had the resources to oversee this plan, it banned it entirely.
The NHB has also asked housing financing companies (HFCs) to institute a clear methodology to monitor the development of housing projects. Payments to developers must now be approved by borrowers in advance.
Post-Subvention Scheme Removal
The National Housing Bank in July 2013 asked housing finance companies to stop offering interest subvention schemes through developers. Now, some developers have come up with their own offers. Typically, these involve the buyer making a small upfront payment and the rest at possession. There are also builders who are offering to pay you rent for booking flats in their under-construction projects. “Some bank continues to finance such schemes as they are not bound by the NHB circular,” says Vipul Patel, Founder, of Mortgage World a mortgage advisory company.
Once the scheme is removed or set aside, the builder and the buyer are only left with the construction-linked payment method/schemes.
Case Laws:
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Ashish Tiwari v Union Bank of India
Hearing a number of petitions under Articles 226 and 227 of the Constitution of India of Homebuyers against Bank/Housing Finance Companies (HFC) disbursing the loan amount through subvention schemes to the respective developer gave interim relief to buyers directing that bank/HFC shall not take any coercive action against the homebuyers to recover EMIs for pending projects where the builders were supposed to pay the EMIs till possession.
Conclusion
Subvention schemes are often used by customers because of their attraction, although they have been linked to harassment and fraud. Although the RBI’s decision to end subvention programs shows progress, the continued existence of such programs in the market calls for further regulatory oversight. Stakeholders can work together to build a fair and trustworthy marketplace that protects consumers’ interests and deters fraudulent acts by adopting protections, fostering openness, and prioritizing consumer education.
A buyer should always go with a construction-connected payment plan. In this scenario, the purchaser owes the builder money proportionate to how far along the project is. The greater risk is taken on by the buyer in any arrangement that offers a discount for early or full payment.
Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at rera@centrik.in & ibc@centrik.in
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