NHB stops home loans with subvention schemes

National Housing finance (NHB) has asked companies to avoid giving home loans with subvention schemes. This circular released on late Friday is applied prospectively. Home loans with subvention schemes are those where the home buyer makes an initial payment of 10-30% (also popularly known as 10:90 or 5:95 schemes) of the total loan to the bank, but the interest burden during construction of the property is taken on largely by the builder. The home buyer pays zero or marginal interest till possession is handed over.
Other Takeaways from circular

  1. Disbursal of individual housing loans should be linked strictly to stages of construction and no upfront disbursal will be made in the case of incomplete/unfinished projects. 
  2. Prior consent of the individual is also required before releasing the payment to the builder. HFCs should put in place in well-defined mechanisms for effective monitoring of the progress in such projects.

Impact on HFCs and RE developers

Growth momentum may not sustain for HFCs to stop financing subvention schemes, which are hugely popular with real-estate developers, more so with Tier-2 & 3 level developers due to high ticket sizes and slow sales. Mumbai and in particular, many parts of NCR has seen rise of such schemes in past 5 years. Even though post RERA and GST implementation, the properties build via subvention schemes is lower, almost 50% properties in Mumbai and NCR in pre-GST/RERA phase are built on this scheme.
This will further impact the lower rung real estate developers as they will see stress in property sales thereby impacting the asset quality on NBFCs and HFCs which have extended loan to them. As liquidity situation is still in dire straits, the wholesale HFCs will provide further headwinds impacting valuations. We need to watch out for the stress occurring due to this circular in the coming months ahead!

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