Will crackdown on rampant misuse of scheme, but dry up developers’ liquidity
The National Housing Bank’s circular to stop developers from servicing buyers’ loans could prolong one of the worst slowdowns that the real estate industry is seeing.
The NHB has advised housing finance companies to desist from offering schemes in which developers service loans on behalf of borrowers, citing rampant fraud in such subvention schemes. Housing finance companies should disburse loan tranches to the developer based on the status of construction.
Experts believe that while this move will help crackdown on the misuse of the scheme, it will also severely impact liquidity in the real estate market, which is already reeling under the NBFC liquidity squeeze.
The sector has an unsold inventory of 1.2 billion sq ft, which is expected to take over two and a half years to liquidate at current rate of sales.
According to Knight Frank India, 10-12 percent home loan market in top eight cities are under such schemes.
“HFCs and NBFCs offered the scheme when the NHB was the regulator. Now, the new regulator, the RBI, has cracked the whip to make it a level playing field for all. It was one of the most important schemes used by developers to draw home buyers for under- construction properties.
In recent times, the schemes were extended to even ready properties wherever unsold inventory was piling up.
The new ruling will make a dent on this side of market as well,” said Gulam Zia, Executive Director– Valuation & Advisory, Retail & Hospitality, Knight Frank India.
“Real estate companies continued to depend on such schemes as an alternative to discounts. We had seen increased sales momentum on the back of such schemes on a project-specific basis. Withdrawal of such schemes could add to the sector’s troubles, and may risk slowing sales velocity and/or asset prices,” Kotak Institutional Equities said in a note which stated that the brokerage remains cautious on the housing finance sector.
“Developers typically seek slab-wise payment from customers. These are linked to project completion milestones. However, the milestones payment schedules are not appraised nor challenged by the customer or HFCs. This led to a practice of developers drawing funds faster than that required by the project and diverting to other projects. This is the key reason for RERA to prescribe ring-fencing project cash flows,” the note said.
Real estate developers are seeking support from the government to seek alternate funding tools for the industry as several funding mechanisms used by the sector are drying up due to increased government oversight.
“The industry is desperately looking for help and support from the government in terms of a solution to the liquidity crunch which is fast leading towards bankruptcy for a segment of developers whose ongoing projects have been stalled or delayed,” said Niranjan Hiranandani, Founder & CMD, Hiranandani Group. “While fraud in such schemes definitely needs to be controlled, the need for alternate funding options is what resulted in subvention schemes being aggressively positioned. The industry hopes that alternate funding sources are made available at the earliest,” he said.