The scheme is only available to buyers who have taken a home loan from SBI for the projects identified and eligible for the bank guarantee.
To regain the trust of homebuyers, State Bank of India (SBI) has announced the Residential Builder Finance with Buyer Guarantee (RBBG) to safeguard homebuyers financially by issuing guarantee for completion of projects to customers availing SBI Home Loans.
Buyers will now be able to secure their investment in the ongoing home projects financed by the bank itself. The term of the guarantee will coincide with the time it takes to receive an occupation certificate for the project.
The scheme is only available to buyers who have taken a home loan from SBI for the projects identified and eligible for the bank guarantee, SBI officials told Moneycontrol.
Under the scheme, the bank has committed to refund the principal loan amount if the developer fails to complete the project. What this means is that if a buyer has booked an apartment for Rs 2 crore and has paid Rs 1 crore, he will get back only Rs 1 crore in the event the project gets stuck. No interest will be refunded.
What is the scheme all about?
RBBG will focus on affordable housing segment in the range of up to Rs 2.50 crores in seven Indian cities initially. These include Mumbai Metropolitan Region (MMR), National Capital Region (NCR), Hyderabad, Bengaluru, Pune, Kolkata and Chennai.
This will ensure that a large number of projects across all budget segments will get covered under it.
Borrowers can seek a refund if the builder fails to meet the deadline under the Real Estate (Regulation and Development) Act. All builders have to get their projects registered under RERA and declare a timeline for its completion.
The guarantee will be available for RERA registered projects and a project will be considered stuck after it crosses the RERA deadline.
Under this product, all reputed builders fulfilling the prescribed criteria by the bank can avail loan between Rs. 50 crore to Rs. 400 crore.
Criteria includes star rating and CIBIL score.
Under RBBG, the guarantee would be given by the bank till the project gets the occupation certificate (OC).
The product also offers loans of up to Rs 400 crore to ‘reputed’ residential developers.
The guarantee will be part of an agreement between India’s largest lender, the developer and the homebuyer. The bank will fund the project and also extend the home loan necessary to buy a house.
"It could be a tripartite agreement or whatever is legally required," the bank officials said.
To begin with, SBI has tied up with city-based real estate developer Sunteck Realty for its three ongoing projects in Mumbai Metropolitan Region (MMR). These include Sunteck World project at Naigaon, 4th Avenue SunteckCity at Oshiwara District Centre (ODC), Goregaon (West) and upcoming project near Lokhandwala at Andheri (West).
"We feel that the partnership of the biggest bank of India and Sunteck Realty as a first brand for the scheme itself stands as an endorsement of our strong brand and product offerings, our track record of timely delivery and financial prudence. This unique initiative will provide multiple benefits to the homebuyers along with faster loan processing, competitive home loan rates along with quality product assurance.
"The guarantee will be part of a tripartite agreement between SBI, Sunteck Realty and the homebuyer. The homebuyers can secure their investment in the ongoing projects financed by the bank itself and can get a refund of the principal amount as per the bank's policy depending on the arrangement mentioned in the tripartite agreement," Kamal Khetan, Chairman and managing director, Sunteck Realty Ltd, told Moneycontrol.
What does the scheme hope to accomplish?
SRBBG seeks to safeguard homebuyers financially by issuing guarantee for completion of projects to customers availing SBI home loans.
"The housing project will be controlled by the bank - it will release funds to the developer and to the buyer. In this way there will be little chance of the project getting stalled or the bank guarantee getting invoked," the official said.
The scheme comes in at a time when the real estate sector is undergoing liquidity issues and under-construction projects have been impacted by the National Housing Bank’s decision to ban housing finance companies from offering interest subvention schemes.
It gives fence sitters a good enough reason to invest in under construction projects, which are usually considered as risky. Currently, with several projects stuck due to last mile funding issues, homebuyers are preferring to go in for ready-to-move-in units that are considered 'relatively safe'.
Real estate experts believe that such a scheme may increase sales volumes. By offering a guarantee on the money they have spent on the house, SBI is ensuring that the homebuyer has no reason to pursue insolvency proceedings in case of project delay or failure. The bank will also ensure that all of the builder’s payments to service providers are done through a SBI account, which will help the bank keep a close tab on any defaults.
Experts have termed it as a 'good move' and a positive for the real estate sector
The underlying provision of this scheme – that the bank commits to refund the principal loan amount if a developer fails to complete the project - will ensure that SBI remains highly selective in its approach and work only with the most reliable and trustworthy developers, said Anuj Puri, Chairman – ANAROCK Property Consultants.
To mitigate the risk of having to issue refunds, it will also keep a regular check on the progress of the project and see to it that it is completed on time. This will eventually give major assurance to all homebuyers who will opt for loans under this scheme from the SBI, and help in boosting their confidence, he said.
The scheme is aimed at safeguarding select SBI home loan clients who may get stuck in a project which has not been able to get completed for any reason/is not able to get the OC.
"There are some caveats - this would apply to only select projects where SBI does a thorough assessment of the builder and project viability - something which means that only few projects will pass muster. It is also not clear whether the pricing for such loans will be higher given the guarantee offered. This would also, of course hold true for the future and not cover existing loans. We hope that more lenders will follow suit and this would be welcome news to new homebuyers who may have been dithering on looking at under construction projects," said Gagan Randev, National Director, Capital Markets at Colliers International India.
Pankaj Bajaj, Managing Director, Eldeco Group, is of the view that the last couple of years have seen a strong preference towards ready-to-move-in properties as compared to under construction projects. The result was that developers of under construction projects started facing a funds crunch which led to a spiral of delayed projects, financial distress and further preference for under construction properties. In desperation developers were going for expensive funding of up to 20 percent per annum in order to complete the project.
Now this product from SBI brings back the confidence in and under construction project. Hopefully other mortgage lenders will follow, he added.
Will interest rate be higher than a conventional home loan rate?
No. There will be no additional cost to the home loan buyer. The builder may have to pay a nominal rate for the bank guarantee, the bank officials said.
In this case SBI is advancing loans to both builders and homebuyers. They will have a lien on the property, the land and various other collateral. Guarantee emanates from their conviction that they can make the builder complete the project as per the RERA timeline.
"They have complete control – almost like a quasi-project manager. This is good for the real estate ecosystem and will help boost sales," said Suresh Sadgopan, founder of Ladder7 Financial Advisories, a financial planning firm.
How will it help builders and homebuyers?
For the builder, it will by all means add more credibility to the concerned project which in turn will help him attract more homebuyers.
For homebuyers, given the condition of the scheme, they will be assured that buying in such projects (associated with SBI) will be least risky because the bank itself would be very wary of associating with unscrupulous players.
Are there any hurdles foreseen going forward?
At the onset of this scheme, it seems fairly attractive and affirmative for both builder and the homebuyers.
The only challenge will be do a constant follow-up on the project progress. The bank will have the additional task of ensuring that the project construction progresses on time for which it will have to set up an extra team of professionals, said Puri.
Jaxay Shah, Chairman, Credai, said that while it is good move, "we have to see SBI how fast, efficient and aggressive they become in funding builder projects and it will remain to be seen how effectively the bank enters into new partnerships with developers because as we understand they will only give a guarantee scheme in projects they have funded".
Homebuyers, however, are skeptical.
"Homebuyers, in any case, get a written guarantee by way of agreement from the builder. The builder buyer agreement has historically mentioned the rate at which penalty will be given to the homebuyer in case of default and also the refund clause. And yet, buyers have been forced to approach Supreme Court, NCLT, RERA or for that matter the consumer court.
"RERA authorities have been reluctant to order for refund on the ground that it may jeopardise the project and consequently interest of other homebuyers. In several instances where homebuyers managed to get refund orders the same has not been honoured. This scheme only reads good only on paper," said Abhay Upadhyay, president, member Forum for Peoples’ Collective Efforts (FPCE).
However, the scheme can be made full proof provided it is ensured that the principal amount is transferred to the buyer’s account on the same date there is a default or the date on which the project timeline lapses as is the case with most insurance policies without approaching any court of law or taking legal steps, he added.
What is the recourse available to buyers in case the project is delayed?
SBI Chairman Rajnish Kumar has been quoted as saying that through this scheme SBI wants to take back the "bankruptcy remote from homebuyers and operational creditors ".
What this means is that by offering a guarantee on the money spent on the house, SBI is ensuring that the homebuyer has no reason to pursue insolvency proceedings in case of project delay or failure.
Legal experts are of the view that the scheme does not prohibit a homebuyer from approaching any of the legal platforms available if the need were to arise - RERA and consumer court - in case the project is not completed or the loan amount is not refunded or for that matter even the NCLT in the event that the developer becomes insolvent. They said a guarantee is legally enforceable and primarily comes under contract law.
The definition of promoter under RERA too is very wide and includes a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments. A bank as a guarantor is involved in the development of the project may even be deemed to fall within this definition.
"Based on a preliminary read, this scheme appears to be two fold – one where the developer can avail a loan for the project after the requisite due diligence has been completed by the bank and also where the homebuyer can avail a home loan from the bank which is backed by a guarantee. Based on the announcement, in the event of default in project completion, the homebuyer is protected by way of a guarantee which ensures refund of money until the project obtains an occupancy certificate," said Yudhist Narain Singh, senior partner, YNS Associates.
"All other aspects of compliance including detailed project registration under RERA shall need to be mandatorily followed by the developers. Therefore, this scheme does not preclude the homebuyer from approaching RERA or the consumer forum for relief in the event that the project is not completed or his loan amount is not refunded. Typically, a guarantee shall only add to the claim of the buyer before any of these forums, since the bank stands as a guarantor for repayment,” he said.
Another thing that needs to be borne in mind is that the banks have to be careful while implementing such a scheme, especially in terms of the wording incorporated in the documentation that will be executed by the customer and the constant monitoring of project development."When the project and the buyer are both financed by the same entity, a lot can go wrong. We have seen examples of this in the past. As per the press release, initially this scheme focuses on affordable housing projects, which is good as it will help streamline it before applying it to other real estate projects. If the penultimate objective is to truly secure the homebuyer and restore confidence in the housing market, then this scheme may prove to be fruitful in the long run," he added.