ATM :: Why 80:20 scheme has high risk for customers?


Oct 22, 2013, 03.48 PM IST | Rajiv Raj, Founder & Director, Creditvidya.com | Published on: Moneycontrol.com
The arrangement had its own flaws. Many times the buyers chose to overlook the risks associated with this tripartite arrangement. The builders are expected to service loans taken in the name of the home buyers.

ATM

The recent measure of abolishing 80:20 payment scheme, a sort of norm followed by buyers and builders in buying new homes, by D Subbarao, on his last day as RBI governor has been misunderstood amply.

It is perceived that the curb has effectively closed the doors on the faces of many home buyers and investors, leaving many critical of the ex-RBI Governor. However, he has taken the right step in the direction of greater good for all the builders, the banks and the home buyers.

For beginners, it was an arrangement between builders, banks and buyers of under construction property. Here the buyer would pay only 20 percent of the value of the property and would pay rest of the money on the day of possession. This advance payment too was financed by the banks.

The equated monthly installments would start only after the possession. The onus of servicing the loans was on the builders in the interim period and it was the perfect recipe for the builders to offload the high priced under construction inventory of flats in the market.

Banks too were happy as long as they were getting the interest on time. And the buyers too were content with the idea that they have to pay only when the building is built completely and they get possession of that property.

However, this arrangement had its own flaws. Many times the buyers chose to overlook the risks associated with this tripartite arrangement. The builders are expected to service loans taken in the name of the home buyers.

Effectively this means that if builders fail to service loans on time, it is the buyer who is defaulting on the loan. The bank would claim such as home loan a Non Performing Asset if the builder does not pay and would tag the home buyer a defaulter.

This means the credit score of the home buyer may go for a toss for no fault of his. If the builder delays and defaults on the payment of interest, the home buyers’ credit score would plunge and over a period of time, he would be a defaulter for the CIBIL.

Till the time RBI announced a ban on such schemes, the banks were selective about the projects and the builders with whom they want to go with such an arrangement.

However, if the scheme was allowed to run, there was a risk of expansion of the 80:20 loans portfolio which would have grown to unmanageable levels. Hence the decision of curbing the 80:20 scheme is in the interest of the greater good.

But you as a home borrower should not relax, especially if you are one who has booked a flat under such a scheme. Keep a track of the project and check if the project is not getting delayed too much. Keep in touch with your bank. If your builder defaults, effectively you are defaulting on the loan.

Your credit report may go for a toss. If you foresee such a situation unfolding it is better to get out of such scheme and opt for a plain vanilla home loan where you start servicing the home loan immediately. This will keep you in a good shape financially.

Source : http://goo.gl/oi61Px

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