Is subvention scheme good for the consumer?

Real estate in India is undergoing a dim phase and the year 2012 has witnessed the plummetting sales and launches across the country. Developers are coming up with innovative plans and schemes along with cooperation from banks to revive sales of houses in the country.

What is a subvention scheme?

Subvention scheme is an innovative scheme introduced by a number of developers as part of their endeavour to make property transactions customer-friendly. Under the subvention plan, a customer buys an under-construction property for which he/she does not have to pay EMIs for a defined period or until he/she takes possession of the house. Usually, private and nationalised banks tie up with developers to offer loans for such subvention plans.

It is also known as 80:20 scheme as the buyer only has to pay 20 per cent as the total cost initially and the remaining 80 per cent is paid at the time of possession. Developers are backing themselves up with this scheme in cities like Delhi NCR, Mumbai and Bangalore where sales of housing units have been on a downward journey. The scheme is gaining popularity with regards to apartments in Chennai as well.

Mid priced segment

Analysts say that the scheme is suitable for mid-segment projects. As the input cost seems to be increasing and the tie up with NBFCs and banks putting the pressure on completion on time, the scheme is taken up for the mid-priced segment. Around 200 developers across the country have been trying to attract home buyers with the scheme. Developers like CHD Developers, Nirmal Lifestyle and Indiabulls are offering the scheme in NCR and SARE Homes are offering it in Chennai.

Tie up with banks

Subvention schemes had been offered only by the NBFCs initially. However, now private banks such as HDFC, ICICI,etc as well as some nationalised banks are also associating themselves with subvention schemes. However, taking into account the risk associated, banks usually fund the projects of Grade A developers with good credit history. Small developers would find it difficult to get funding from the banks as the association of banks lends a credibility to the projects.

Mechanism of subvention scheme

Builder/developer starts a project and ties up with banks or non-banking finance corporations (NBFC) who sanction home loans for the purchase of a property. The banks then release the loan upfront according to the demand for units in the project. The builder pays the pre-EMI for 1-2 years, till the buyer get possession of the units.

The scheme proves beneficial for the developers as they can get access to the funds for the project at a much cheaper rate of interest. The funding comes in the form of home loans which are cheaper than commercial loans. Developers also enjoy credibility with the backing of banks. This is beneficial for them as well as they only pay interests on behalf of the buyers.

For banks also it serves as a beneficial scheme as banks get access to a larger customer base and can impose application processing fees and prepayment charges on the customer. Also, in case of subvention scheme, time taken for loan processing is less.

Is the subvention scheme good for customers?

Subvention scheme has the customer at the centre of every realty transaction. The path to own a dream home is made easier for the home buyer as he/she need to pay only 20 per cent of the total property worth upfront. As developers have tie up with banks, customers get access to home loans easily. However, before deciding on whether to take up the scheme, we need to know how the scheme holds out for customers.

Advantages:

(i) The major advantage for the home buyer is that he/she is not burdened by EMIs during the construction period. The customer can save the money to be paid as EMIs and invest the same in instruments like FD and pay the bank, lowering the debt burden.

(ii) The customer can reap in the benefits of price appreciation during the construction period.

(iii) If he/she is living in a rented house, then there is no increased pressure of paying both EMIs and house rent.

Risks:

(i) Be sure of the property documents as in case of a disputed property, you would need to get the money back form the bank.

(ii) If there is a delay in delivery and construction time increases, then the customer is bound to lose out more.

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