A slump in demand for residential real estate has seen innovative financing schemes like the ‘80:20’ and ‘75:25’ schemes return to the market in a different avatar. These schemes come after a brief pause following a cautionary note from the Reserve Bank of India to the banks.
The earlier 80:20 or 75:25 schemes are those where customers were required to pay 20% of the value of the house to the developer and the rest of the amount was sourced and disbursed through a tripartite agreement between the customer, the developer and the bank. Under this agreement, the remaining 80% was given to the developer upfront by the bank. The developer would pay interest to the bank on this amount till it handed over possession of the property to the buyer. After which, servicing of the loan would be the homeowner’s responsibility.
Such schemes were widely marketed by the developers in the last couple of years since it helped improve sales to some extent in a sagging economy characterised by a slump in the housing demand.
But in September, the banking regulator had cautioned the banks against being part of such schemes. While most real estate developers were against this move, some welcomed it as they thought it would bring more transparency to the real estate market.
The concern with such schemes earlier was that real estate developers were getting these loans at rates that were meant for individual borrowers, rather than the corporate rate prescribed for a risky sector like real estate. Also, since the developer was getting all the money upfront, there were chances of misappropriation as these funds could be routed to other projects or purposes, exposing the banks and the customer to risk.
There are two new forms that these 80:20 schemes. One is where the agreement is only between the developer and the customer. Under this scheme, the customer can pay 20% and book the property and has to arrange for the remaining funds through bank debt or otherwise at the time of possession.
The second form is similar to the original scheme with banks being involved, but instead of disbursing the funds to the developer upfront, the schedule of payment has been made construction-linked.
“The change that RBI’s cautionary note brought was that now banks do not disburse the entire money upfront and instead disburse it