Once upon a time, when all was hunky-dory, things were simple for developers. They just needed to announce a project and buyers would line up to buy them, financed by banks willing to provide cheap loans. The developer, then, would take his sweet time in delivering the project. Buyers did not like the delay, but rising real estate prices made the delay worth their while. Even banks did not complain too much, as they earned interest income from borrowers, both during the construction period and after delivery. The developer pocketed a neat profit and went on to the next project. Everyone was happy.
The circle broke when real estate prices stopped rising. Most developers started delaying their projects inordinately. This led to buyers/borrowers defaulting on their commitments to lenders. The lenders, in turn, had to provide for rising non-performing assets. The virtuous circle turned into a vicious one where the buyer did not trust under-construction projects and insisted on completed projects. Developers started innovating. So, 20:80 schemes came into being, but borrowers soon discovered there were clauses hidden in the contract that required them to pay interest in the interim, if the developer defaulted on his obligations to the banker.
The government, finally, woke up, and the Real Estate Regulation Act (Rera) was enacted. However, its implementation has been stymied by various states which made regulations that were completely contrary to the law, and in practice, did not implement even the weaker state-level regulations. Consequently, Rera has not led to a revival of buyer’s trust in under-construction properties.
State Bank of India’s latest effort—the Residential Builder Finance with Buyer Guarantee scheme (RBBG) —should be studied against this backdrop. The borrower will be protected in case of delay in construction beyond the date of completion mentioned on the Rera website. The interest during the construction period is payable only by the developer (without any liability on the part of the buyer to pay even if the developer defaults). If the developer is unable to complete the project by the scheduled completion date, the buyer’s down payment is returned with interest by the lender. In case the construction is completed by the developer within the scheduled time, then the loan shifts to the buyer and becomes a standard home loan. A standard product like this needs the backing of Reserve Bank of India.
Such a scheme is likely to build borrower trust in under-construction property. It will also give a much-needed fillip to the construction industry with its vast employment generation capabilities and positive externalities on a host of industries such as cement, steel and others.
The writer is a Sebi-registered investment advisor