What will happen to subvention schemes in COVID times? Will developers currently strapped for liquidity be able to service their commitment? Real estate experts caution that several builders may find it tough and may even default on their interest payment commitments with sales and cashflows drying up due to the lockdown.
Despite the subvention scheme being treated as a term loan and being eligible for the three-month moratorium, many builders won't be able to pay and may even default on their interest payment commitments. Some may even be forced to scuttle out of the subvention commitment period, an expert noted.
With no cashflows, some builders may even resort to the force majeure provision and annul any commitments on agreements signed with buyers in the past, especially those facing major liquidity issues, according to industry experts.
Under subvention schemes, homebuyers pay the initial amount, and the bank pays the loan amount to the developer according to the construction stage, while the interest portion on the loan disbursed is paid by the developer until possession. What this means is that the real estate developers pay pre-EMIs (equated monthly instalments) on behalf of homebuyers for a certain period specified in the contract or the date of possession.
Subvention schemes were beneficial to the extent that they provided relief to homebuyers who found it difficult to afford both rent and interest. In 2013, the Reserve Bank of India had advised banks to exercise caution while financing purchases under the 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 National Housing Bank (NHB) had asked housing finance companies (HFCs) to "desist" from offering loans under interest subvention scheme after there were complaints of default.
The result of the two advisories was that several banks and later the HFCs stopped funding under the scheme. However, there are still some homebuyers whose loans bought on subvention scheme are still continuing.
The coronavirus pandemic and the subsequent lockdown led to the RBI announcement on March 27, 2020 that all banks and NBFCs should be permitted to allow a moratorium of three months on repayment of term loans outstanding as on March 1, 2020.
“In most cases, the force majeure provision would have been included in the purchase document and with builders currently strapped for funds, several developers may find it tough to service this commitment. In fact, some may even decide to default on their interest payment commitments,” says Anckur Srivasttava of GenReal Advisers.
Some may even want to scuttle out of the entire subvention commitment period by resorting to the force majeure provision. The present cashflow situation is such that for some of them it may not be a question of willingness to not pay but ability to pay, he adds.
The legal view: Subvention schemes are akin to term loans
Legal experts say that a subvention scheme can be categorised under the term loan as it is part of the homebuyers’ mortgage and the three-month moratorium is applicable for it subject to the homebuyer and the developer applying for it.
“Considering it is the RBI guideline, banks would definitely have to permit a three-month moratorium for buyers and builders if they were to apply for it. The same logic of a term loan would apply for a subvention scheme because it is a home loan except that there are two signatories to it,” explains Kunaal Shah of Trilegal.
But who will pay the interest that accrues post the three-month moratorium? Legally, the compoundable interest is to be paid by the developer.
Assuming that the builder-buyer agreement does not take care of it, another agreement between the homebuyer and builder may have to be signed detailing who will pick up the additional interest.
What happens if the builder stops paying interest? In that case, the default interest will accumulate under the home loan and it is the homebuyer who would have to pay the amount post possession.
“An agreement for sale is registered in the name of the homebuyer. The builder only has a lien for the unpaid amount and if that continues to remain unpaid, the eventual liability would be on the buyer COVID or no COVID as that is the legal position under the law,” says another legal expert.
Under the present circumstances, it is the developer who will have to pay the liability. “He is obliged to pay the interest as per present rules. Ideally, installment should have been interest free for the three-month moratorium period. It should have been declared as zero period for three months,” said RK Arora, chairman, Supertech Group and president of the UP chapter of Naredco.
In cases where the subvention was offered before the NHB advised housing finance companies to desist, it was an assurance that had to be paid until the offer of possession. “Contractually, the developer is bound to pay subvention on behalf of the homebuyer to the bank but the issue here is whether the developer has the financial ability to continue paying,” says a developer who does not want to be named.
Post the NGT and Supreme Court ban on construction due to pollution issues and now the lockdown, the developers’ ability to pay subvention has obviously shrunk, he adds.
The three-month moratorium is only an option. The builder can choose not to take it. “It is going to invite litigation going forward until RERA steps in and declares the three months as a zero period,” says the developer.
Real estate developers have recently asked the finance ministry to provide relief on cashflows as the three-month moratorium does not help them much, especially these schemes.
“When sales have come to a grinding halt, where do we recover cashflows from. There needs to be a relief package on this as it will be a problematic area,” says the developer, adding NHB should allow subvention schemes again to help developers boost sales.
A banker Moneycontrol spoke to said that while it is difficult to estimate the quantum of subvention loan sales versus disbursement of conventional home loans, the scheme was an additional selling proposition for the developers. Of 25 deals that a developer entered into with buyers, at least 10 were under this category. “These didn’t come cheap by any standards, they only helped the buyer pay at the time of possession,” he explains.
One thing is clear though; while homebuyers may have benefited with not having to pay interest on the home loan and the rent under the scheme and developers also gained in terms of increased sales, the actual borrower remains the homebuyer and in the event of any default by the builder, it is the homebuyer whose credit history is bound to get impacted.