Lately, the buzzword within the real estate market seems to the Subvention scheme. The scheme seems to have generated some level of interest among the end users; however, not many people are aware of what this scheme entails. The Logical Buyer (TLB), through this article, endeavors to highlight the various facets of this new buzz word.
So, what does subvention means? The Merriam Webster’s Dictionary defines subvention as: “an amount of money that is given to a person or group by a government or organization”. In real estate’s parlance, subvention refers to a scheme where a buyer’s flat is funded by an organization (read Bank or any financing organization) through an agreement of which there are three parties – the buyer, the builder and the bank. The objective of a subvention scheme is to assist a buyer in arranging the funds for the purchase of flat/property simultaneously hedging his risks by limiting his liabilities in repaying the loan. This is explained in detail in the article later.
Usually, in a subvention scheme, a buyer books a flat/property by making an upfront payment which may range from 10% to 25% (the range may vary but this the most common range that TLB Group has witnessed). Then a tri-partite (TPT) agreement is signed between the buyer, builder, and bank in which the balance of the amount is pledged by the bank to be paid to the developer. The schedule of this payment may also differ from builder to builder and banker to banker. Depending on the schedule of payment as agreed in the TPT agreement, the bank continues to disburse the installments directly to the builder. Despite the direct disbursement to the builder by the bank, the buyer remains the borrower and is responsible for the loan repayment.
The subvention schemes, as seen in the market, are available in a wide variety. The most common subvention schemes are available in the following variants: 10-80-10, 15-80-5. Lately, the developers are experimenting with different forms, and schemes following 30-40-30 and 10-70-10-10 are gaining acceptance in the market. To understand what the structure of these schemes means, let us understand it with an example. In a A-B-C scheme, A% of the total flat’s value is to be paid at the time of booking, B% of the value is paid at the completion of any set milestone (which could be completion of superstructure or any other thing), and C% is paid at the time of offer of possession.
In the past, schemes following patterns of 80-20 or 75-25 were also prevalent; however, the Reserve Bank of India (RBI) has put a ban on the proliferation of such schemes.
Advantages of a subvention scheme
- From a buyer’s standpoint, in a subvention scheme, a developer bears the interest costs till the possession is an offer or for a fixed period of time (ranging from 24 months to 36 months as specified in the agreement). This saves the buyer from the dual costs in the form of rent that he pays as well as the EMI he has to pay. In the current environment where a majority of real estate projects are delayed, this is a welcome offering to the buyers that helps them curtail their financial burden.
- From a builder’s standpoint, a subvention scheme helps him to market his project and increase the attractiveness of the offering. In the environment where demand for real estate is low, banks are wary of lending directly to the banks since they can go bust leading their loans to turn into bad debt. However, banks are more comfortable in diversifying and minimizing their risk by giving a loan to buyers. This helps a builder in arranging for the required liquidity to execute the project.
Disadvantages/Risks of a subvention scheme
- Usually, buyers tend to get enticed by the mention of “No EMI till possession”. However, it has been observed that in most of the cases there is a mention of a limited period for which a buyer doesn’t pay EMI which can be 24 months to 36 months. Buyers often don’t take a cognizance of this and realize it at a later stage.
- The troubles pile up for a buyer if there is a delay in handover of the flat to the buyer. The subvention agreement hedges a buyer from interest repayment only for a limited period. Once that period is over, the buyer is expected to pay the EMIs. The buyer tries to find reprieve from the delay penalty promised by the builder in the agreement. However, based on TLB’s interactions with buyers from several projects across the country, builders usually try not to pay delay penalty citing weird reasons. This is, of course, wrong on the builder’s part which can be challenged in the court. But the builders have access to good legal resources and the buyer often shies away from taking a builder to the court.
- While it is clear that a builder will pay EMIs during the subvention period, the buyers believe that a builder will always pay the EMIs on time on his behalf. This is not always true. A builder too can default on some of the EMIs willingly or unwillingly. This damages the creditability of buyers in the form of lower CIBIL score.
- In most of the subvention schemes, a buyer is not allowed to exit the project till the subvention period expires. This eliminates any possibility of profit booking on the part of a buyer. In some cases, the builder may permit the buyer to make an exit; however, the exit charges in such cases can be prohibitively high.
- While the subvention scheme may appear to be attractive, the fact is that a property bought in a subvention scheme may cost more than the regular properties. A builder may have smartly marked up the price of a flat so as to recover the costs that he incurs in repaying the interest of the loan.
TLB’s take on subvention scheme
So, what does this mean to a common buyer? With rampant malpractices and delays in the real estate market, a buyer has limited avenues to make a safer choice. The advantages offered a subvention scheme may be enticing but buyers often tend to ignore the details of the agreement, and like always the devil lies in the details. Before making a decision, the buyer must read the agreement carefully to avoid disappointment and surprises at the later stage.
For booking a flat in a subvention scheme, a buyer should also take in to account the fundamentals of buying a flat – the due diligence in assessing the credibility of builder and overall attractiveness of the project Documents to check before buying an under construction property. If the end result of this due diligence is in affirmative, he may then consider opting for a subvention scheme. But then here, he should also weigh all the associated risks, and then make an intelligent decision.
To conclude, all the benefits of subvention scheme wipes out if there is any delay. As mentioned above, the “No EMI till possession” clause also comes with a rider. Unless you are absolutely sure that builder will pay the EMIs till you get the keys to your apartment, The Logical Buyer suggest you stay away from such schemes.