Subvention Scheme and the risks associated with them

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.

Conclusion

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.

6 thoughts on “Subvention Scheme and the risks associated with them

  • September 29, 2015 at 6:18 pm
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    Amit,

    While I agree that subvention scheme in general is bad, there are variations in this scheme which you have missed out in your analysis, which are slightly better in protecting buyer’ s interest.

    One such variation is HDFC 10:80:10 scheme. This is similar to any subvention aceheme, except that the 80% disbursement which bank does to builder is deducted of the pre-emis interest of the subvention period.

    For example if bank has to disburse X lacs, the bank would actually disburse X – pre emi interest for 1 year. That is the pre emi is taken in advance from the builder, so there is no chance of default, at least till the agreed subvention period is over.

    Hence not all subvention schemes are bad per se.

  • September 29, 2015 at 10:43 pm
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    Wave Infratech is a perfect example for cheating buyers under such scheme….

  • November 6, 2015 at 8:03 pm
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    Abhinav….. Why are you saying that Wave Infratech is a perfect example for cheating buyers under such scheme….please explain it as I am buying a flat in the same schemes from wave?

  • January 14, 2016 at 1:39 pm
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    While I appreciate the above efforts in educating the buyers of a possible risk in Subvention scheme, the scheme is actually a win win situation for all three parties involved – Builder, Financier and buyer. It varies from project to project, so buyer has to do a proper analysis before entering this scheme. As rightly mentioned above, the condition that builder must “pay EMIs till possession in case of delay beyond the agreed schedule” is a basic pre-requisite for a buyer. The positive for a buyer is obvious that he can book a flat by paying a minimum amount and he gets a good breathing period of at least three years to make arrangements for balance payment and probably by that time he will also be able to pay the EMIs. There is also no burden of paying both Rent and EMIs in case the buyer has purchased it for end-use. If the scheme goes as per the agreement, it is a best option for any buyer. The risk is in case the builder turns up as a big defaulter and there is big delay in possession. All new agreements under this scheme generally have this condition of NO EMIs til possession as buyer has become very smart. SO ACT SMART AND TAKE ADVANTAGE OF SUCH SCHEMES

  • February 11, 2016 at 12:41 pm
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    “EMI Default by builder impact CIBIL score of a buyer” is not true, bank cuts the emi before hand from disbursement amount of builder

  • August 5, 2016 at 11:38 am
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    In case of delay, Ashish , how on earth Bank could have deduced before hand that builder is going to dealy for 12 months and deduct the” Pre- emi interest” on 24 or 36 or 48 or 60 months basis? is my query clear. BAnk at most would deduct interest say upto 36 months for before disbursing the amount to builder and builder giving delay after that, BUYER has to pay the interest for delayed period , may be for two years or in the event of builder going bust, bank would sell the property to recover their dues,, i think so , and what about buyers money….he is a loser on money, time and property

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