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Saving grace

RBI debars upfront 80:20 loans for property to protect bankers and buyers

On the last day of his tenure as the RBI governor, D V Subbarao came up with a policy which could be seen as a move to prevent India's sub-prime crisis. According to the policy, the RBI has asked banks to discontinue disbursal of sanctioned loans as a whole to builders and instead provide loans keeping in mind the level of construction of a project. The main idea behind this move was to protect the interest of the buyer and the lender.

With the policy in place, realtors will no longer be able depend on the 80:20 scheme to raise funds. Earlier, the scheme was used to boost sales in periods of slow demand and raise money for other projects when all other sources would run dry.

How the policy works
In the 80:20 scheme, the buyer pays 20 per cent of the purchase price initially and the balance on receiving the possession. Meanwhile, the builders are able to get loans for the remaining amount at cheaper rates. The builder agrees to pay interest on the borrower's behalf for a specific period while the bank disburses the entire loan amount to the builder.
The RBI has realised that such a scheme could cause problems in the real estate sector if builders start to default. The end buyer would be the one held liable since loans have been taken under his name.

Impact on builders
Builders relying on the scheme to fund their projects will be hit the most. The RBI hopes to identify the weak spots in the realty sector through the implementation of the policy.
Established developers with the capacity to complete projects on the basis of their own resources and strong financials will be able to stay afloat while smaller players might be the first to default. Therefore, with the new policy, the RBI hopes to protect the interest of the banking sector and buyers in case of a collapse.