The National Housing Bank (NHB) has asked housing finance companies (HFCs) to stop funding subvention schemes where a developer or a builder offers to pay the interest on loans taken by a home buyer.

The NHB has asked HFCs to disburse loans based only on the stage of construction of a project and that an upfront payment should not be made. In a circular issued last week, the NHB said that it had received complaints on such products.

“Instances of frauds having been allegedly committed by certain builders using subvention schemes have also been brought to the notice of the NHB…Based on a review of the matter, HFCs are advised to desist from offering loan products involving servicing of the loan dues by builders/developers on behalf of the borrowers,” the NHB said.

“The prevalent products of HFCs, if any, should also be reviewed on the above lines. It is clarified that the above stipulation shall also be effected in cases wherein the HFC is yet to commence disbursements under the sanctioned cases,” it added.

In a difficult market marked by unsold inventories, builders or developers have in the past come up with such schemes to attract customers.

The practice under such schemes is of the buyer making a part payment for the amount for which he has taken a loan, while the interest is paid by the builder till the project is complete.

The buyer who starts to pay EMI only after possession, saves on the interest component. Moreover, there is also an impression that the project will get delivered on time since the developer was paying the interest.

Areas of concern

Sources said the NHB was worried about cases where the entire money for which the loan was taken by the borrower was given to the builder or the developer since there was a risk that the project may not get completed.

Therefore, the NHB is insisting that disbursements should happen only based on the progress of the project.

“It is another detrimental news for the real estate industry. It will definitely hamper the sales cycle of real estate developers,” said Parth Mehta, managing director, Paradigm Realty.