Companies & Sectors
Realty prices to crash as RBI curbs innovative borrowing schemes

RBI has taken away the last funding resource from developers, which may lead to cracking of the realty sector that is holding on to inventory since past few years

Reserve Bank of India (RBI)'s latest warning to banks about not lending money to builders or developers under the 80:20 or 75:25 schemes is most likely to crack the realty sector. Over the past few years, developers have been holding on to prices due to availability of finances. And when funding from other sources dried, developers came out with these new innovative schemes in collaboration with banks and financial institutions.


According to Pankaj Kapoor, the managing director of realty research firm Liases Foras, it (the RBI move) will add to the woes of the developers who are facing a cash crunch. “Advance disbursement through 80:20 was a cheaper way to organise finance. In the absence of this too, the liquidity crunch may force the developer to reduce the price to stimulate sales,” he said.


Obviously, developers are aggrieved with the new notification from the RBI. In a statement, Lalitkumar Jain, chairman of the Confederation of Real Estate Developers' Associations of India (CREDAI), said, "Abruptly issuing such circulars, advising bank against established practices only harm the sentiments and disrupts business plans. This at the end creates a setback for projects, affecting end-consumers."


In its notification, RBI has cautioned banks and prospective home-loan customers about the pitfalls of ‘innovative loan schemes’ entailing upfront disbursal of individual housing loans to builders in case of incomplete, under-construction and green-field housing projects. "In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project or houses and upfront disbursal should not be made in cases of incomplete and under-construction or green field housing projects," the central bank notification said.


Moneylife has been pointing out that high property values and interest rates, coupled with a lower loan- to-value ratio, are becoming serious obstacles for average homebuyers.


A number of banks and housing finance companies are promoting home loan products such as the 80:20 or 75:25 schemes, which involve tripartite agreements involving lenders, developers and property buyers. The basis of this move is that, though these schemes do invariably mention the financial implications to the consumer in the fine print, many consumers are evidently unable to decipher the fine print.


"This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector, and also to protect the financial institutions that provide funding in it," said Shobhit Agarwal, managing director for capital markets at Jones Lang LaSalle India.


What are 80:20 or 75:25 schemes?

Usually builders come up with various schemes during the festive season to sell high-priced apartments to take advantage of the surge in spending. However, flats are not selling and the inventory is increasing. Though builders have tried to keep prices artificially high for over the past few years, they buckled under pressure and launched lucrative schemes to push sales in the residential segment. Among their tactics was making a 80:20 or 75:25 offer.


Under these schemes, a buyer has to pay 20% or 25% of a flat's cost upfront. The rest is funded by the bank after signing a tripartite agreement between buyer, developer and the lender. The developer, who receives full amount, sometimes even before starting construction, offers to pay the equated monthly instalments (EMI) on the loan till he completes the construction. This is contrary to the normal practice in a bank home loan, where the lenders link disbursals to developers depending upon various stages of construction of housing project.


"Even though such schemes look great, buyers should take precaution as they are being offered for under-construction projects. The completion risks of these projects remain and one must check the builders' track record and financial strength before jumping in," a real estate expert had told Moneylife, preferring anonymity.


RBI said such housing loan products are likely to expose banks as well as their home loan borrowers to additional risks. For e.g. in case of disputes between individual borrowers and developers or builders, default or delayed payment of interest and EMI by the developer or builder during the agreed period on behalf of the borrower, non-completion of the project on time. "Further, any delayed payments by developers or builders on behalf of individual borrowers to banks may lead to lower credit rating or scoring of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders or developers without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds," the central bank said. also calls such schemes as hugely risky (for buyers). "The builder has the full amount, without having constructed anything. They get financing in your name, and get to pay a lower interest because YOU are the one taking the loan (individuals get a lower home loan rate than developers, a distinction I totally disagree with – if anything, individual home loans should be charged a higher rate). If they don’t construct the building, the bank now has no collateral. But since its your loan, you have to repay anyway. This can be a disaster since you don’t have a property now for which you have a loan," says Deepak Shenoy in the report. (


Are 80:20 or 75:25 schemes innovative?

No. These schemes are neither new nor innovative. Earlier, during September-October 2012, Mumbai-based builders who turned desperate to sell flats and were offering steep discounts have to their credit a more innovative scheme like 90:10! However, the '90:10' scheme was available only for affluent buyers whose budget was between Rs2 crore to Rs5 crore. Indiabulls introduced the '10:90' scheme for a project located in central Mumbai. For this scheme, it had tied up with HDFC and ICICI Bank to provide loans to customers at that time.


In another option at that time, builders were offering highly discounted rates to those who come up with cash up front. In one case, a posh apartment in central Mumbai was available for Rs16,000 per square foot for full cash-down payment - against the going rate of Rs40,000 per sq ft.


In the past, several developers were offering to pay pre-EMI on a home loan, provided that the borrowers take the advance disbursal facility (ADF). Under the ADF, the entire loan amount is disbursed to the developer and the buyer has to immediately start paying EMIs, even before the construction is complete or before taking possession.


Realty investment through PMS?

Yes. During 2010, asset management companies (AMCs) were offering real-estate scheme cobbled together under its portfolio management scheme (PMS). Investor's money was invested in residential projects under construction with builders, presumably at some agreed price. When the builder sells out the project, the profits were shared between the builder and the financier (the PMS scheme).


The investors are asked to ‘commit’ amounts, 20% or so paid up front. The upfront amount depends on the investment projects identified by the AMC. As they identify more investment opportunities, they make further demands from within the committed amounts. As and when any project is exited, the AMC distributes the money to the investors.


Read: Realty schemes and the ground reality



Ramesh Poapt

3 years ago

Sch schemes, if not stopped might have gone to the extent of US housing crash, where there were chain of intermediaries on a single property.The bundle of properties were sold back to back to one after other.The big deals were bundled n qualitatively classified and then passed on in many hands.That disaster destroyed many too big to fail names.And then there was 80%+ correction in the property mkt there...!Still the mkt is paralytic!

Anil Agashe

3 years ago

Well done RBI. Why was it not done earlier is the only question.
Now go after developers who have defaulted, take over properties.

RBI says companies can use ECB for general corporate purposes

In July, India Inc raised over $3.71 billion from overseas markets through ECBs and FCCBs. The RBI move is aimed at encouraging capital inflows and arrest decline in rupee value

In order to encourage capital flows,

The Reserve Bank of India (RBI) on Wednesday eased external commercial borrowing (ECB) norms by allowing companies to use funds raised from foreign partners for general corporate purposes.


In a notification, the central bank said, “On a review, it has been decided to permit eligible borrowers to avail of ECB under the approval route from their foreign equity holder company with minimum average maturity of seven years for general corporate purposes”.


Till now borrowings in the form of ECB were not permitted to be utilised for general corporate purpose. However, the RBI has put certain conditions for availing the benefits of relaxed norms.


It said, “Minimum paid-up equity of 25% should be held directly by the lender (overseas partner). Also, repayment of the principal will commence only after completion of minimum average maturity of seven years and no prepayment will be allowed before maturity."


The measure is aimed at encouraging capital inflows and arrest decline in rupee value.


India Inc raised over $3.71 billion from overseas markets in July through ECBs and foreign currency convertible bonds (FCCBs). In June, it had raised $ 1.95 billion through this route.


Google KitKat is the successor to Jelly Bean

The list of Google's Android software over the years includes Cupcake, Donut, Ice Cream Sandwich, and Jelly Bean

Internet search giant, Google said its next version of Android software would be called 'KitKat' in keeping with its penchant for giving tasty names to its software for powering mobile devices.


In a blog post, California-based Google, said, “Since these devices make our lives so sweet, each Android version is named after a dessert. As everyone finds it difficult to stay away from chocolate we decided to name the next version of Android after one of our favourite chocolate treats.”


The list of Android software names over the years includes Cupcake, Donut, Ice Cream Sandwich, and Jelly Bean.


KitKat is a chocolate-covered wafer created by British-based Rowntree’s, now produced worldwide by Nestle.


In a promotion deal, Google is enticing people with chances to win Android-powered Nexus 7 tablets or credit at its online Play shop by buying KitKat candy bars featuring Android robot icons on wrappers.


Android software powers more than a billion smartphones or tablets worldwide, according to Google.


Smartphones powered by Google’s Android software increased their global market share as iPhones lost ground in the absence of new models being unleashed by Apple, the International Data Corporation reported last month.


Accordign to IDS, during the June quarter, Android’s share of the smartphone market grew to 79.3% while that of iPhone slipped to 13.2% from 16.6% in the same three-month period last year.


Apple is 'well positioned' to recapture market share with the release of a new iPhone and the next-generation iOS mobile operating system, according to IDC mobile phone research team manager Ramon Llamas.


Apple yesterday sent out invitations to a 10th September event at its California headquarters where new iPhones models were expected to be unveiled.


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