Mumbai, Sept. 3: The RBI today cracked down on the popular 80:20 home loan schemes that offer the luscious bait of a deferred EMI payment.

Under the 80:20 and 75:25 schemes, borrowers have to pay only 20 per cent of the cost upfront. The EMIs on the loan become payable only after the home loan borrower takes possession of the flat.

The innovative home loan scheme has been very popular in the metros. But the RBI feels both the bank and the borrower face big risks.

The reason: the loans are disbursed to the builder upfront and the disbursals are not linked to various stages of construction of the housing project.

The RBI advised banks “not to make upfront loan disbursals for incomplete, under-construction and greenfield housing projects”.

The advisory is probably the last one sent out during outgoing RBI governor D. Subbarao’s tenure which ends tomorrow.

The problem stems from the fact that the schemes entail a tripartite agreement between the bank, the builder and the buyer of the housing unit.

The EMI on these loans are supposed to be serviced by the builder during the construction period, which can extend up to three years. The obligation to pay the EMI is passed on to the home loan borrower once he secures possession of the flat.

“Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks in case of disputes between individual borrowers and the builders, default on EMI repayments by the builder in the initial stages, and non-completion of the project on time,” the RBI said in a statement today.

Home loan borrowers can also suffer the ignominy of a low credit rating score if the builder defaults on the EMI repayment. Moreover, the individual will have to pay the EMIs from the date stipulated in the loan agreement, irrespective of whether the project is completed or not.

The scheme became popular because it appeared to be a win-win for everyone. The home loan buyer did not have to pay the EMI from the moment he took the loan, which meant he could continue to stay in a rented apartment. For the developer, the scheme was beneficial as he got immediate access to funds that could be used to complete the project.

The RBI said that in cases where loans are disbursed upfront on behalf of individual borrowers in a lump-sum to builders/developers without any linkage to stages of construction, banks can be saddled with disproportionately higher exposures with the concomitant risk of diversion of funds.

Industry experts said the latest advisory would have an impact on some markets. Anuj Puri, chairman of property consultant Jones Lang LaSalle, said the greatest impact would be on under-construction projects in markets like Delhi and Mumbai where such schemes have been offered liberally.

Lalitkumar Jain, chairman of the Confederation of Real Estate Developers’ Associations of India (Credai), said the RBI should have consulted stakeholders before issuing such circulars.

“The housing finance institutions or banks safeguard their interests while devising such instruments. Sudden and abrupt circulars like this one harm the sentiment and disrupt business plans. This is a setback for these housing projects and will affect end consumers,” Jain added.

There are four projects offering such interest subvention schemes in the Calcutta market.

Biswadeep Gupta, vice president (marketing) of Eden City project, one of the first companies in India to launch such a project in February 2009, said his company had already sold more than a third of the entire project under this scheme.

“It has been hugely popular. We have never defaulted on payment to banks. In fact, we have delivered around 400 flats out of the 550 units sold under the scheme,” Gupta added.

The 80:20 apartment project at Mahestala, on the south-west fringes of Calcutta, had run into severe headwinds after the collapse of Lehman Brothers in September 2008 when the property market slumped. The scheme had helped rescue this project.

Abhijit Das, office director of property consultancy Cushman & Wakefield, said the scheme had especially benefited people who could not afford to pay rent and shoulder an EMI burden at the same time.

Earlier this year, bankers like HDFC chairman Deepak Parekh had advised borrowers to be wary of such schemes. “Complete up-fronting of construction finance to developers, even before the ground is broken, is dangerous,” he had said in the corporation’s annual report for 2012-13.