Why Did Reserve Bank of India ban 80:20 home loan schemes?

On his last day in office, Dr. Subbarao, RBI (Reserve Bank of India) Governer dealt a big blow for the real estate industry. His decision as announced by the RBI is to do away with the popular 80:20 housing loan schemes.

The RBI has barred banks/ housing finance companies (HFCs) from disbursing such loans. The scheme had gained a lot of popularity in recent years. It essentially allowed the buyer to pay 20% to 25% of the total amount required for purchasing a property, upfront.

The balance would be payable only upon completion. Such schemes were typically available for properties that were still under construction. It worked in the favor of two (2) parties at least -the seller / or developer & the bank / HFCs

For the bank / HFC, it worked well as it was able to classify a loan for construction as a retail housing loan. Therefore it did not need to provide the higher provisioning that is typically required for construction loans.

For the seller / developers/ promoters this scheme was a boon as they were able to avail low cost funds. True that they had to pay the EMIs on the balance amount to the developer till the point of completion. But, even then the cost of funds remained much lower than what it would have been had they taken the loan upfront from the banks.

 However, the risks involved were ridiculously high. If the developer defaulted on the delivery schedule, it increased the risks for the bank. Again, if there was any discord between the buyer &  the developer during the course of construction then again the developer / promoter could simply stop paying the EMIs; thereby increasing the risk for the bank. Therefore the RBI felt that such schemes were increasing the risks in the banking system.

The real estate developers  promoters have of course hit back saying that discontinuing the schemes would hurt the buyers. But, it is actually in the best interest of the buyers too if such schemes are done away with.

Why?

Because lets not forget the initial 20% to 25% payment is out of the pocket of the buyer. So, if there is any delay, etc, then it is the buyer's amount that is stuck with the developer. Essentially the RBI's decision safeguards the buyer's hard earned savings.

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