Subvention schemes: Gimmick or useful financing option?

Subvention schemes: Gimmick or useful financing option?

Critics of subvention schemes, often argue that it is merely a marketing methodology to attract customers, at a time, when developers are struggling to boost sales amidst a slowdown. According to these critics, such R

Critics of subvention schemes, often argue that it is merely a marketing methodology to attract customers, at a time, when developers are struggling to boost sales amidst a slowdown. According to these critics, such schemes send a message that the developer has no other source of funding, to complete a project.

From a home buyers’ standpoint, there are always risks involved, unless the developer is a reputed one and has a track record of timely delivery. Raveesh Kukreja in Gurgaon, would not mind opting for a subvention scheme. “I do not have the resources to pay an EMI, in addition to the rent. However, my only concern, is whether the developer’s promise of delivering the project in the next four years, will be met,” says Kukreja, who is aware that he could spoil his credit history, if the project is not completed on time. “Most of the subvention schemes or buy-back schemes in the market, have been floated by developers who are struggling with timely delivery,” he adds.

Experts suggest that banks should appoint professional project management agencies, to monitor the project’s development and disburse the funds, accordingly. These agencies are supposed to alert the bank in case of any issues, thereby, creating a layer of due diligence.

RK Arora, chairman of the Supertech Group, asserts that subvention schemes are not marketing gimmicks. According to him, there is nothing wrong, if it helps buyers to fulfill their dreams of owning a house, with minimum investment and by paying easy installments. His company’s schemes, with down payment options of as low as 2%, have been received well, especially by those who wish to plan for their children’s future, with small investments, he says. “The scheme is attractive to investors, who look for appreciation over the short and long term, with a small investment,” feels Arora.

See also: Subvention schemes: The hidden risks for buyers and the market

Although banks may exercise caution, when it comes to subvention schemes, other non-banking finance companies (NBFCs), who are hungry for business, may be exposing themselves excessively to the housing market. This could result in higher non-performing assets (NPAs), as they have no control or institutional mechanism, to ensure that the developers deliver projects on time and do not divert the funds.

Moreover, excessive risks taken by developer could also adversely impact the lending organisation. There have been instances where, once the developer receives all the funds that were to be generated from the project (20% from the consumer and 80% from the bank), the motivation to complete the project on time reduces.

A developer may also divert the received funds, to acquire more land. This tendency could lead to a financial crash, when unforeseen market conditions upset the developer’s risk calculations. In a sluggish market, this has been the biggest worry of the Reserve Bank of India, which suggested stopping this scheme.

 Due diligence and background check can save you a lot of heartburn.

Happy Investing

Source:Moneycontrol.com