Subvention Scheme: An Organized Crime perpetrated by Banks & Builders to dupe innocent Young Home Buyers or A Boom ?
“The word ‘Subvention’ is derived from Latin word “Subventus” which means monetary help or support.”
– KK Singh Advocate (Expert Real Estate Laws & RERA, KK Singh Law Firm Regd.)
Subvention Schemes & Real Estate: The Link!
One comes across several advertisements and hoardings by builders that scream for prospective buyers’ attention with slogans like “Buy now, pay later!” or “Pay 10% now & rest after possession” or even better “Book now: No EMI till completion” etc.
These are some of the examples of subvention schemes offered by developers of real estate with tie-ups with banks and financial institutions. The discounts, freebies are extensively promoted by the builders to lure prospective young homebuyers who obviously find these schemes irresistible.
“The target group is home-seekers who are currently living on rent and wish to avoid interest payment in addition to rent.”
Mid segment young homebuyers love the concept of paying a small amount like 10% upfront and avoid having the burden of Equated Monthly Installment (EMI) as they are already weighed down by rent payment.
Subvention Schemes: How Do They Work?
A tripartite agreement is signed between the buyer, the banker and the developer. A booking amount ranging between 5-10% is paid upfront by the buyer & the rest of the amount is paid by the bank in the form of loan to the buyer.
Thus, the most significant aspect associated with such subvention schemes is that the interest cost is borne by the developer and the lenders disburse the loan to the developer based on the progress of the construction. The interest is paid by the builder till possession is granted to the home buyer or for a fixed period as mentioned in the buyer-seller agreement.
RBI’s Diktat Against One-time Loan Disbursement!
Prior to 2013, the disbursement of home loans under subvention schemes was made at one go and the banks used to pay the full loan amount to developers upfront but the RBI clamped down on such schemes.
The RBI directed the lenders i.e. the banks to disburse loans according to construction milestones, as it wanted to reduce the risks involved and safeguard the homebuyers.
As the developer got all the money straight away, he had little incentive to finish the project on time. Thus, it was a risky proposition for both banks as well as the borrowers, in case the developer defaulted or the project got delayed. In case of any delay or default, it was not the bank but the buyer who got to bear the brunt.
The RBI took cognizance of these risk factors practiced under disguised fraudulent intentions on the part of Banks & Builders both and in 2013 asked the banks to stop this practice and instead told them to link payments to the progress of construction.
Prima facie it look as if “Loan disbursement is linked to the stage of construction, minimising the risks for banks and borrowers. The developer undertakes to service the interest component of the loan until a specified period. This is an incentive offered to buyers instead of giving an upfront discount on the going rate.” Whereas the truth is far from these straight lines, explanations are mentioned below.
Subvention Schemes: Opportunities & Lure!
The popularity of Subvention Schemes lies in the fact that homebuyer feels privileged as s/he is not burdened by EMIs from the initial stage as these schemes generally give a breathing period till possession.
Going with these schemes, homebuyers do not need to fret about cash flows as the interesting part will be taken care of by the developer.
Another advantage that an innocent homebuyer, who is living on rent, sees is that they would not be bogged down by paying both; the rent as well as the EMI.
Subvention Schemes: Drawbacks & Pitfalls!
The biggest stumbling block of Subvention Schemes comes to the front when the real estate developer defaults or the project gets delayed. In such cases, the homebuyer suffers greatly as the loan is in his name and naturally the onus of repaying it also lies on him.
Additionally, a builder’s non-payment or late payment of EMI can spoil the credit score of a homebuyer as the loan is in his name.
A subvention scheme may turn out to be a double-edged sword if the developer fails to deliver the project on time, the burden of both rent and EMI will have to be borne by the homebuyer.
It has also led to many cases under IBC, RERA and Consumer Courts apart from regular cases.
“Subvention schemes tempt buyers to buy something they may not otherwise buy. The risk involved is that the buyer is expected to start paying EMIs after the subvention period is over, even if s/he has not yet received the possession of the property. In such a scenario, the customer faces the risk of overpaying or, in some cases, risk pertaining to delivery of the property.”
Latest Directive By NHB:
National Housing Bank (NHB) in July 2019 has directed Housing Finance Companies (HFCs) to refrain from lending under subvention schemes. This of course has clipped the wings of HFCs but not eliminated subvention schemes altogether. The builders are still offering ‘rent’ and ‘EMIs’ etc. to the homebuyers.
“Some banks/NBFCs continue to finance such misleading schemes as they are not bound by the NHB circular.”
“After the NHB ban, some builders are offering to reimburse the interest to the customers instead of the lender.”
This loophole to be addressed cautiously, “Since developers are independent entities, they are free to create schemes within the allowable legal framework. The borrower/home buyers should take legal advice before signing up such manipulative & misleading TPAs.”
A bigger dilemma is faced by the borrowers who have already signed up for such schemes as the NHB circular covers not only new products but also the existing ones.
“In case of a delay in construction, the lender/Bank/NBFC can withdraw from the agreement as the disbursement is construction stage-linked.” Under such circumstances, borrowers need to approach the builder and get the agreement reviewed otherwise they will be left in the lurch.
Way Forward For Homebuyers: Tread Cautiously else be ready to be duped for life!
For a homebuyer subvention scheme can undoubtedly be beneficial for people who want to avoid the burden of EMIs as they are staying on rent and their income is limited. But there is a catch to it and people must not go for it blindfolded as most of the time they are duped by the manipulative real estate developers in active connivance with Banks & NBFCs.
Here is a list of precautionary steps that a homebuyer needs to take before opting for any subvention scheme:
#Step 1. The financial strength of the developer should thoroughly be scrutinized by the prospective homebuyer.
#Step 2. Additionally, it is the duty of a homebuyer to find out the past record of the builder in delivering projects on time.
#Step 3. Checking ownership details and the necessary clearances of the project are a mandatory precautionary step. “One should ask the developer about approvals, exit options and legal policies. The buyer should also ensure that the property is not entangled in legal disputes and has the necessary clearances & registered with appropriate RERA Authorities.”
#Step 4. Not only the developer but also the bank’s antecedent should be looked into by the potential homebuyer. “The bank’s profile must also be checked by the buyer,” as there are several instances wherein Banks/NBFCs were found actively involved in getting manipulative/fraudulent scheme signed in active connivance with Builder only with an intention of duping innocent home buyers.
#Step 5. Also read the fine prints of tri-partite agreement carefully to eliminate any doubt about the clause of pay 10% and no EMI till offer of possession. In fact the TPA terms are very illusory stipulating either certain period like say 36 months from the date of signing of TPAs or till offer of possession, which ever is earlier. In this case if Builder fails to deliver the project on time, which happens in more than 90% cases now a days particularly in & around Delhi/NCR region. Then Buyer/Borrower has no choice than to find himself/herself in quandary about what to do with double whammy of paying rentals as well EMIs that too on such a loan, which is gradually falling in to NPA due to no sight of project completion in near future.
#Step 6. Also in subvention plan loan disbursements the prices of flats are artificially escalated to the extend that builder gets hugely benefitted. Also this is established practice in such schemes that Builder instruct disbursing Banks to deduct their EMIs upfront while disbursing the loan amount to Builder on behalf of innocent buyers. So Builder though apparently appears to be supporting innocent home buyers of bearing the burden of EMIs till offer of possession or till such stipulated time mentioned in TPAs, whichever is earlier. However in practice Banks & Builder both are duping innocent buyers first by escalating the market price of mortgaged flat, then Banks are instead of linking the gradual disbursement of home loans instalments, disburse complete or more than 90% of amount instantly to Builder, in utter disregards to linking the disbursement of loan with construction progress of the project. So such type of dubious & illegal practices both on the part of Banks & Builders are highly detrimental to the financial health of home buyers/borrowers.
#Step 7. Finally, reading the fine print and going through all terms and conditions, like the promised possession date in the documents and the penalty to be paid by the developer if the project is delayed, etc., is of utmost importance before signing the agreement.
#Step 7. But now due to promulgation of RERA Act-2016, home buyers are completely protected against such fraudulent practices and even home buyers can drag both Bank & Builders to the court under various provisions of laws of the land for cheating / conspiracy / fraudulent embezzlement of funds, breach of contract, money laundering, delayed possession of flats inter alia.
The Last Word!
Not all subvention schemes can be labelled as bad nor are all of them good, therefore, the most critical aspect for a prospective homebuyer is to examine each scheme on its merits through legal experts and then take a call. Remember your life time earnings are at stake, single mistake can ruin your life forever.
KK Singh Law Firm provides guidance to homebuyers and says, “One can go for a subvention scheme if one earns Rs 6-20 lakh per annum as it provides a good opportunity to own a house without paying EMIs till the subvention period.” But by strictly following above mentioned cautions and advices.
“One should avail of this scheme if the chance of the developer missing the deadline is low.”
“In today’s scenario, where over more than 10 lakh houses are delayed, home loan companies/banks/NBFCs can’t work in a traditional manner where they force buyers to pay interest on time on projects which are delayed. As of now home loan banks/NBFCs don’t have any responsibility to ensure that the project for which the loan is taken is being built or not, unless buyers hold them responsible for active connivance or demonstrating dereliction of their due diligences while sanctioning and disbursing home loans blindly to Builder.”
Thus, as more and more banks and housing finance companies are offering subvention schemes it is advisable for homebuyers to be extremely cautious.
“Being aware & informed is the ‘mantra’ for home buyers if they don’t want to fall into the trap of dubious subvention schemes!”
Name: KK Singh, Advocate
- MBA (HR), LL.B, MA (Gold Med), B.Sc (Bio)
- DPT, CSCP-ISB Hyderabad,
- Former Asst Vice President West Africa/UAE
- Air Force Veteran, Heartfulness Trainer
- Cell +91-9971566945
Company: KK Singh Law Firm Regd.
Location: Greater Noida, UP, IN
Member Bar Council of Delhi: 18 Aug 2015 | Total Posts: 35
My Published Posts