Booked a house under the 80:20 scheme? Here’s what you should know

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A homebuyer from Bengaluru, Ashish Agarwal, booked an apartment in 2013 under the 80:20 scheme by the builder. Under the scheme, the financial institution releases 80 percent of the loan amount to the developer even before construction starts.

Today, Agarwal and 175 others are yet to get possession of their homes, even after paying up more than 90 percent of the apartment cost.

“There were 600 units that had to be delivered by the builder after three years. Till date, not a single unit has been handed over. We paid 15 percent of the apartment cost as down payment. Eighty percent of the cost was received by the builder from the bank, on behalf of the buyers in the beginning itself,” a buyer told Moneycontrol.

Under the scheme, the builder was expected to pay pre-EMIs to the bank, and he did it till the pandemic.

“After the moratorium scheme in October 2020 was announced, the builder said he was not in a position to pay the pre-EMIs and asked the buyers to pay the money and give their consent for it. He told us he would adjust the amount against the remaining 5 percent we have to pay at the time of possession. Today, the buyers have ended up paying much more than the cost of the apartment, around Rs 27 lakh. Worse still, we are still not sure of getting our homes,” he said.

No EMI–until-possession scheme trouble

Another group of buyers had booked apartments in Gurgaon in 2014 under the ‘no-EMI–until possession scheme. The builder paid a few pre-EMIs but later stopped paying them, saying he was facing a financial crunch.

“Till date, the buyers have paid almost Rs 55 lakh for an apartment that costs Rs 70 lakh. Some have taken loans from financial institutions at an interest rate of more than 10 percent when the bank interest is at its decadal of around 7 percent. While some buyers continue paying their EMIs for fear of their CIBIL score getting affected, some stopped paying and approached the court,” a buyer told Moneycontrol.

Court finds collusion between developers, banks

On February 4, 2022, the Delhi High Court came to the rescue of these buyers and passed an interim stay order in their favour by restraining banks and housing finance companies (HFCs) from taking action against them for recovering EMIs for incomplete projects.

“The balance of convenience, at this interim stage, lies in favour of the beleaguered homebuyers, keeping in view that they are being penalised despite not being at fault,” Justice Rekha Palli had noted, adding that “grave and irreparable loss will be caused to the petitioners if they are not granted any interim protection”.

The court observed that the petition “brings to light the well-known sorry state of affairs, which has been recently going on in the construction industry”.

The buyers, through their lawyer, Aditya Parolia, had informed the court that banks and financial institutions had disbursed loans to the builders even before construction had started.

Banks continued to expect buyers to service the EMIs when it was the builders who had undertaken to pay the amount until possession.

The court observed that the petitioners “appear to have been left in the lurch and despite paying the advance amount and investing their hard-earned money to purchase their residential homes, the construction of the residential flats/apartments have not been completed till date”.

The buyers cannot be made to suffer the consequences of this apparent collusion between the banks/HFCs and the developers, it added.

‘Loans disbursed without regard to norms’

The court said “prima facie, it appears” that the loans were disbursed without any regard to the advisories of the Reserve Bank of India (RBI) and the National Housing Bank (NHB).

It said banks and HFCs disbursed the loan when the construction was incomplete and were now asking homebuyers to pay the amount initially required to be paid by the developers.

Parolia said that buyers have also prayed before the High Court that their CIBIL score be restored and the pre-EMIs paid for by the buyers be refunded by the builder. They should also get back ECS default charges that have been levied.

RBI advisory on interest subvention schemes

In 2013, the RBI had advised banks to exercise caution while financing interest subvention schemes “in view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues.”

It had advised that disbursal of housing loans sanctioned to buyers should be linked to the stages of construction of the housing projects and that upfront disbursal should not be made in case of incomplete or under-construction or greenfield housing projects.

In 2019, the NHB had also asked HFCs to "desist" from offering loans under interest subvention schemes after complaints of default.

What is a subvention scheme?

Under a subvention scheme, a tripartite agreement is executed between the builder/developer, bank and the buyer. It mainly targets buyers who wish to avail home loans for purchasing a property from builders. On opting for a subvention scheme, the buyers will be required to pay 5-15 percent of the total price to the developer/builder at the time of booking the property.

Classic case of profile funding: Court

Anshul Gupta, Advocate, Supreme Court, ANG Partners, Advocates and Solicitors, told Moneycontrol that some buyers had to approach the Delhi High Court under the Writ Petition under Articles 226 and Articles 227 of the Constitution of India to protect their fundamental legal rights. The buyers had no recourse except to come under the Writ Jurisdictions of the High Courts.”

The Consumer Courts, RERA and other allied forums have failed to address the issues of distressed homebuyers, he said.

“This is a classic case of profile funding, where the builder, instead of taking a corporate loan, enters into a collusion with the bank and takes personal loans on people’s CIBIL rating, default in payments and run with their money, leaving the buyers with a multitude of cases and pressure by the bank. The High Court has come forward to safeguard buyers’ rights, where the other courts and tribunals were leaving people without any recourse,” he said.

‘Homebuyers not liable to pay pre-EMIs’

Following the order, homebuyers will not be liable to pay pre-EMIs. The court has noted that, in all cases, the builder, banks and the buyers have entered into a tripartite agreement. The builder has promised to pay the pre-EMIs to banks till the possession of the booked units are handed over to the homebuyers.

The court noted that merely because homebuyers entered into a tripartite agreement with banks/ HFCs and the developer, they cannot be held liable to repay the loan amount on account of default of the developers who have not only stopped paying pre-EMIs, but have also not, till date, handed over the flats to the homebuyers, Gupta said.

The banks, in collusion with the builder, disbursed the loan in contravention to the circulars of the RBI and the NHB, without examining whether the developers were in a position to complete the construction or not. The bank and the developers both knew that the project would not take off and it would fail.

In recent judgments of the Supreme Court also, a similar situation has arisen where the apex court noted that the pre-EMIs shall be paid by the builder to the bank, so that homebuyers do not get any notice from the bank. Thus, the liability of paying loans now rests with the builders as it was agreed in the tripartite agreement, he explained.

It should be noted that though several banks and HFCs stopped funding under the scheme, no ban has been imposed. Some buyers who had signed up for subvention plans earlier continue to suffer because some builders have stopped servicing the loan (as promised under the tripartite agreement) during the pandemic.

Protection available to homebuyers

“It is no news that the real-estate sector is in shackles. Pandemic, on top of this, has accentuated the discrepancy in the sector. With this, we see that many builders are defaulting on their payments. Thus, in the business, the builders are unable to effectively complete their housing projects and are not able to hand over possession on time. But as the process suggests, banks will indefinitely continue to demand EMI payments, and if the liable customer defaults, the lenders can strategically seize other assets to claim their rightful dues,” explains Sonam Chandwani, managing partner, KS Legal & Associates.

“But protection under the Consumer Dispute Redressal Commission (CDRC), at the district, state and national levels are provided. This offers a substantially better alternative to the long-drawn processes of courts for customers,” he said.

“In recent cases that have come to light, the commission has emphatically and strategically protected customers by ruling against leading builders and ensuring protection for the hard-earned money of the buyers by imposing penalties for delays and not effectively non-delivering houses,” she added.

Last year, the Delhi High Court passed an interim order in favour of a homebuyer by staying the proceedings before the Debt Recovery Tribunal for non-payment of the loan amount to the Union Bank of India. The buyer, who had booked an apartment in Greater Noida nearly five years ago, had stopped paying monthly instalments after the developer failed to deliver the project on time.

The court directed the bank that had given the home loan to stop recovery proceedings against the buyer till further orders. The bank had moved the Debt Recovery Tribunal (DRT) after serving notice on the buyer under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act. The DRT, too, had initiated proceedings against the buyer.

The homebuyer, along with his wife, had booked a 3 BHK Flat worth Rs 44 lakh with PSA Impex Pvt Ltd. To finance the flat, the petitioner paid Rs 11 lakh from his personal savings and took a loan of Rs 33 lakh from Corporation Bank (now, Union Bank of India) under a tripartite agreement (a subvention agreement, signed by the buyer, bank and builder).

Construction-linked payment best bet

Legal experts say that it is always advisable for buyers to opt for a construction-linked payment plan arrangement. In this, the buyer is required to pay the amount to the developer, based on the actual progress of construction. Any scheme offering a discount for upfront and early payment exposes the buyer to greater risk and should be avoided.