Why the 10:90 plan is a big hit in the real-estate market now, and what homebuyers should be aware of

Why the 10:90 plan is a big hit in the real-estate market now, and what homebuyers should be aware of

The scheme requires homebuyers to pay 10% upfront and the remaining amount only at the time of possession. While many builders are boosting sales through the scheme, especially during COVID-19, buyers should go for it, only if it does not involve taking loans at the booking stage itself.

VANDANA RAMNANI
DEC 2, 2020



This festive season, several real-estate developers pitched in with a 10:90 scheme to boost sales. Mumbai-based Nahar Group offered the scheme, under which the homebuyer needs to pay only 10 percent at the time of booking and the rest on possession.

Hiranandani Group offered a flexi-pay scheme for its 1BHK units in the Regent Hill project, under which the buyer is required to pay only 5 percent at the time of booking and no EMI for the next 12 months.

Bengaluru-based Embassy Group offered the scheme for its luxury homes. NCR-based Ajnara India Ltd offered the payment plan in Ajnara Daffodils.

While sales are indeed increasing, Moneycontrol looks at how these schemes work, their benefits and the risks involved.

Are 10:90 schemes good for buyers?

According to Vaibhav Suri, partner, L&L Partners, schemes like 10:90 or 20:80 are very good for buyers as they reduce monetary exposure on account of possession-related defaults and gives them flexibility to arrange the remaining funds. They are always better placed from the buyer's perspective as there is no loan liability from Day One.

However, the sale price in such schemes will always be higher than conventional construction linked or time-linked plan or subvention plan, he said.

“The price is locked in and the risk for buyers (under the 10:90 scheme) is minimal. Even if the builder does not deliver the unit, the buyer would have paid only about 10 percent and he would not have to service pre-EMIs until the apartment is ready,” says Anckur Srivasttava of GenReal Advisers.

“Therefore, from a cash flow perspective, a 10:90 scheme is comfortable for a buyer,” he says.

Do indirect subvention plans only include 10:90 schemes?

No. NCR-based Ajnara India Ltd also offers the 30:40:30 payment plan in Ajnara Ambrosia, and 20:20:20:20:20 plan in Ajnara Fragrance projects.

Oberoi Realty has a scheme, under which the customer has to pay 15 percent upfront and 85 percent on possession, and in the developer subvention scheme, the customer pays 25 percent upfront and the remaining 75 percent on possession.

Customers who paid up and registered units before December 31 also benefited from 100 percent refund of stamp duty and registration charges, which were being offered on these schemes.

For the ready-to-move project Esquire at Goregaon East, the company offered a scheme wherein the buyer could pay 25 percent to move into the new unit and then pay equal instalments of 15 percent for five years at zero interest.

So, what is the problem?

Well, 10:90 payment plans are relatively new and have not yet faced challenges as is the case with full-fledged subvention plans. However, buyers should be wary of plans that involve taking home loans at the booking stage itself. That’s when these schemes become an indirect form of subvention schemes, which have landed many buyers in trouble.

Under subvention schemes, homebuyers have to pay the initial amount, and the bank pays the loan amount to the developer, according to the construction stage. The interest portion on the loan disbursed is paid by the developer until possession (generally three years). What this means is that real-estate developers pay pre-EMIs (equated monthly instalments) on behalf of homebuyers for a certain period specified in the contract or till the date of possession.

However, in the event of a builder default, the homebuyer, since he is the actual borrower, is held liable and it is his credit history that will get impacted.

The problem is with subvention schemes which have landed many buyers in trouble.

Under subvention schemes, homebuyers have to pay the initial amount, and the bank pays the loan amount to the developer, according to the construction stage. The interest portion on the loan disbursed is paid by the developer until possession (generally three years). What this means is that real-estate developers pay pre-EMIs (equated monthly instalments) on behalf of homebuyers for a certain period specified in the contract or till the date of possession.

However, in the event of a builder default, the homebuyer, since he is the actual borrower, is held liable and it is his credit history that will get impacted.

Then, why didn’t the govt ban subvention schemes?

In 2013, the Reserve Bank of India 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 National Housing Bank (NHB) also asked housing finance companies (HFCs) to "desist" from offering loans under interest subvention schemes after complaints of default.

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

Can subvention or indirect subvention schemes attract punishment?

Adverse action from RBI and/ or punishment can arise if schemes like 5:95 and 10:90 have an element of subvention, i.e., from Day 1, the homebuyer takes a home loan and builder assumes interest liability, on behalf of the buyer, till possession, says Suri.

“If schemes like 10:90 or 5:95 do not involve buyers taking home loans (to arrange for remaining 80-90) at the booking stage itself or otherwise, there is no assumption of interest liability thereon by the builder. Then such schemes cannot be equated with subvention and cannot be held illegal,” explains Vaibhav Suri, partner, L&L Partners.

If it’s not illegal, what’s wrong with subvention schemes?

Several cases have been filed in High Courts and Supreme Court against developers who have stopped servicing the loan signed up as part of subvention plans earlier.

Take the case of Shaji Sarma. He had bought an apartment for Rs 1 crore way back in 2013 through a subvention scheme, wherein the developer was liable to pay the pre-EMI till the possession of the flat. Post the COVID-induced lockdown, the developer stopped making the payments.

He has also not yet given possession of the housing unit. The bank started sending demand letters to him two months ago and asked him to pay up the pre-EMIs. Sarma and a group of other buyers have filed a case against the builder before the Maharashtra RERA (Real Estate Regulatory Authority).

What are the chances of builder defaults?

As far as subvention schemes are concerned, “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.

In fact, the problems associated with subvention schemes have increased during the pandemic. With no cash flows, some builders resorted to the force majeure provisions and others tried to annul any commitments on agreements signed with buyers in the past, especially those facing major liquidity issues, according to industry experts.

Indirect subvention schemes, such as the 10:90 schemes, are often launched for very few units to lure the buyer right at the inception / launch phase or near the completion stage (last 8-10 months). Understandably, these schemes are not popular for builders during the construction phase, when they need steady revenue flow, explains Suri of L&L Partners.

How many subvention schemes are there now?

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 developers. Of 25 deals that a developer entered into with buyers, at least 10 were under this category. “They didn’t come cheap by any standards, since the buyer only had to pay at the time of possession,” he says.

Happy Investing

Source: Moneycontrol.com