The State Bank of India’s (SBI) recently-introduced loan offering – Residential Builder Finance with Buyer Guarantee – has been the centre of attention since its launch last week. As the name suggests, the assurance to prospective home-buyers on safeguarding their interests in case the project is abandoned is the scheme’s USP. However, this is not a different loan variant. Interest rates as well as other terms and conditions will be the same as those of its regular home loans. After October 1, the bank’s new retail floating-rate loans are linked to the Reserve Bank of India’s (RBI) repo rate.
If you book an under-construction house in an SBI-approved project in which the bank has assessed the builder’s reputation risk to its satisfaction, you will be eligible for the benefit. The scheme aims to safeguard home buyers financially by issuing a guarantee for completion of projects to customers availing SBI home loans according to the bank’s official release.
“Customers will now be able to secure their investments in the ongoing home projects financed by the bank itself,” it added. Currently, investors in under-construction properties are left in a lurch if the construction is not completed. Not only do they have to continue paying their home loan EMIs, but also the rent during the period if they are currently staying in a rented house.
What’s the offer?
In this arrangement, the buyer can take a loan of up to Rs 2.5 crore. This ensures that a large number of projects across all budget segments get covered. The guarantee scheme is applicable only for under-construction housing projects where SBI is the sole lender (i.e. project is entirely financed by SBI). The bank will lend only to builders with a strong credit rating and Credit Information Bureau (India) Limited (CIBIL) score. The developer can take loans ranging between Rs 50 crore and Rs 400 crore under the scheme.
“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 and work only with trustworthy developers,” says Anuj Puri, Chairman of Anarock Property Consultants.
At present, though, the bank has signed a Memorandum of Understanding (MoU) with Mumbai-based Sunteck Developers for three projects being developed in the Mumbai Metropolitan Region.
“These home loans will be available at existing interest rates (starting at 7.9 per cent) to borrowers. They can seek a refund under the RERA act, if the project is delayed” says Rajinish Kumar, Chairman, SBI. Developers are required to declare a timeline for project completion on the Real Estate Regulatory Authority’s website. The developer will get a grace period of a maximum of six months from the date of possession specified on the website to complete the project and deliver the booked flats. In case the builder fails to give possession even after grace period, then the bank’s buyer guarantee scheme will come into play. The guaranteed refund scheme will be valid till the occupation certificate (OC) is obtained by the builder. According to the bank, no additional cost will be passed on to borrowers opting for this scheme.
Kumar added, “There will be a thorough due diligence of a developer approaching us to associate in these scheme. We will select only those housing projects in which we have total confidence of timely completion and passes our specifications at different stages before signing MoU.”
Initially, the scheme will be launched in seven metro cities, starting with Mumbai. The bank is planning to expand later based on the response from the developers and demand from borrowers for this scheme.
“In this scheme, SBI will underwrite delivery of the projects. So, the bank will play the role of the arbitrator, the monitoring agency and lend to buyers. It seems to be a win-win situation for the developer, lender and borrower,” says Anurag Mathur, CEO of property consulting firm Savills India.
What doesn’t work?
This guarantee scheme is applicable only to housing projects fully financed by the SBI, limiting the choice for buyers. “There is a possibility that many larger housing projects may not be covered as they would have been financed by other big lenders too, besides SBI,” says Rajesh Mhatre, CEO-real estate of Vascon Engineers Ltd.
A buyer has to incur down-payment, interest cost, goods and services Tax (GST), registration and stamp duty charges while opting for under-construction property. This amount, however, will not be refunded if there is a delay in giving possession. “Ascertain the loss you could incur if the project goes bust. The bank will, most probably, just refund the principal amount repaid until then and write off the loan if the project cannot be revived. There is no protection available to the consumer under the current legal framework on own contribution, stamp duty, registration, GST and brokerage,” says Vipul Patel, Founder, MortgageWorld, a loan consultancy firm.
Only the principal amount repaid by you until then will be eligible for refund, the rest will have to be foregone. Moreover, you will have to continue servicing the interest on loan during the six-month grace period – that is from the date of completion mentioned on the RERA website to the date the guarantee clause is called into play.
The borrower’s choice
You should review the agreement while signing with the builder and lending bank. Also, go through all relevant clauses related to project delay. “In case any milestone in the project is delayed, whether the bank guarantee clause get triggered or if it’s linked only with the scheduled completion of the project date, needs to be reviewed thoroughly,” says Shalini Gupta, Co-founder and Chief strategy officer of MyLoanCare.in. Also, check the reasons for delay included and excluded in the agreement to claim any refund from the bank in case the project is stalled. “External factors such as a change in government norms or any natural disaster affecting the construction of the property may be excluded from the guarantee scheme,” says Hakim Lakdawala, Promoter, Goodwill Developers.
The scheme is intended to be a confidence-booster for prospective home-buyers spooked by concerns around under-construction projects being abandoned. It aims to offer them some succour. However, even if the principal repaid is refunded, you might have to be prepared to forgo the down-payment, GST, stamp duty, registration and other charges paid at the time of acquisition. Interest paid, too, may not be eligible for the refund. It would be wise to wait till further details emerge before signing up for under-construction projects under the scheme.