Home financiers now insisting on construction-linked payment

Home financiers now insisting on construction-linked payment
The Economic Times, December 28, 2009, Page 26

Paramita Chatterjee & Arun Kumar, NEW DELHI

HOME loan providers are now insisting on construction-linked disbursal of funds to new projects, as they look to make developers more accountable after getting stuck in several stalled projects.

A number of developers have either stopped construction midway or slowed down due to shortage of funds and poor sales in 2008 and the first half of 2009. Lending institutions expect the move to help them monitor the progress of construction and make developers accountable, said a senior executive with a public sector bank. “Buyers in such projects are in a difficult situation. They have to pay monthly installments towards the loan without getting the possession of house. They also end up shelling out monthly rents during the period,” he said, requesting anonymity.

HDFC, one of the largest lenders in the home loan segment, has discontinued the practice of up front disbursals and linked the flow of funds to progress of construction, said another industry executive who asked not to be named. A spokesman for HDFC declined to comment.

Developers initially used to offer homebuyers up to 10% discount on up front payment. These developers subsequently diverted substantial part of funds to other projects. The delay in completion of work left buyers in a lurch. “There is a high probability of default by such borrowers,” said the CEO of a leading housing finance company.

In construction-linked payment, the home finance companies or banks do not release the funds up front. They release of around 30% funds initially and the rest is disbursed as per the progress of projects. “In such cases since the exposures are not full and the monthly repayment obligation for borrowers will be lower,” said another banker.

“Many developers have now changed the payment schedule to construction-linked as against timebound payment. This is good for the industry,” DLF group executive director Rajeev Talwar said. However, banks and home finance companies should release 30-35% of the funds towards the lands and development cost, Mr Talwar said.

The lenders have also become more conservative in disbursal of loans. In a volatile real estate market, they offer lower valuations for the property against which they disburse the funds.

“Till 2007 when the home prices were escalating, lenders’ valuations were normally higher than the actual price. Currently, the evaluators of these banks normally value to property at 5-10% lower than the actual cost. As a result, the borrowers need to fork out more to bridge the gap,” said an industry executive.

According to industry estimates, disbursements of home loan in the organised system of financing in the first six months of the current fiscal has been around Rs 60,000 crore. In 2008-09, it touched Rs 1,00,000 crore approximately, while in 2007-08 the amount was around Rs 1,30,000 crore.