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The new circular issued by the Reserve Bank of India (RBI) disallowing banks from making upfront payments to builders in 80:20 or 75:25 loan schemes will benefit homebuyers as they will get timely possession of their premises.

Since the banks will now release the amount based on the progress of construction, and the builder has to pay the equated monthly installments (EMIs) until he hands over the premises to the buyer, banks can effectively leverage their position to force the builder to complete the construction on time.

While a majority of builders have welcomed the RBI’s decision, some say it will disrupt business plans.

Experts say there will be a short-term impact on sales.

Sunil Mantri, chairman of Indian Merchants Chamber (real estate committee), said the circular would be beneficial in the long run.

“There was the possibility of builders diverting the funds to buy new land instead of investing in the project. There is no logic in disbursing the entire amount, which is in effect the consumer’s loan, to builders who have not even started work,” he said.

Manju Yagnik, vice chairperson, Nahar Group, a real estate firm, termed it a win-win situation for all stakeholders. “Since the banks release the amount according to the stages of construction, it is in a position to pressurise builders for speedy construction. If the entire amount is paid in advance, there is no motivation for the builders to complete the project,” she said.

However, some have called it a regressive move which will adversely affect sales.

The Confederation of Real Estate Developers of India (Credai) said the RBI should have consulted the stakeholders before issuing the circular. “Abruptly issuing such circulars and advising banks against established practices only harms sentiments and disrupts business plans,” said Credai chairman Lalit Kumar Jain.

A similar stance has been adopted by the Builders Association of India (BAI), which said it would increase the problem of liquidity. “Funding is big hurdle and this move will worsen the situation,” said Anand Gupta, secretary, BAI.

Via : TOI