HOME LOAN FRAUD

In continuation to my last article of precautions, banks should employ in extending home loans one would highlight in this article a very ingenious way of fraud the Builders have devised in the present market situation.

Home Loans as of today are the cheapest form of institutional finance available at most acceptable terms and with one of the longest repayment period at times extending to 30 – 40 years.

In the present situation of Builder, they are finding it difficult to raise capital from any means i.e. Financial Institutions are not open to lending them as the balance sheets do not support; the private finance is prohibitively priced and buyers are scarce. This has made the cash flow situation of some the builders really precarious. No surprise that they are resorting to all sort of devious means!

Modus operandi of this scam?

Real Estate Companies in India

Step 01: Launching Interest Subvention
The builder launches an interest subvention scheme on a project which is either complete or is to be completed very soon, say in another couple of months.

Step 02: FIs participation at higher price
The financial institutes participating in the scheme are made to extend loans at the “Maximum Retail Price” of the builder as against the “Market Operative Price”. For example, if the builder’s price is Rs. 10000 per sq ft and the market operative price is Rs. 7000 per sqft then the financial institution agrees to extend loans at Rs. 10000 per sq ft.

Step 03: Loan eligibility of the buyer utilized
The buyer is provided with an easy entry with either the margin money being returned to him completely or at least partially. Only the loan eligibility of the buyer is utilized.

For example, if the Financial Institute has mandated a payment of 20% of the loan amount then the buyer is made to pay 10% and then the loan is raised to the tune of 80%. The balance of 10% is then, kept in abeyance to be paid at the time of “Sale/Conveyance Deed”.

Now this 10% paid by the buyer is paid back to the buyer in various forms, such as cash (black money), through the broker channel, in-kind etc. but now the buyer effectively has no Skin in the game.

Step 04: Further benefits to the buyer given
The builder creates further benefits for the buyer to lure the buyers.

(a) An interest subvention for a longish period on an otherwise ready project. The logic of this scheme is baffling because this implies that the buyer is staying in the property at no cost for the period of approx. 03 years.

(b) In some cases instead of interest subvention, the builder pays to the buyer a monthly interest in form of rent.

(c) In some cases, the buyer is paid cash back on making such a purchase which is way beyond what he has paid as the margin money.

(d) The maintenance charges for the period in question are waived off.

(e) There are other kind incentives extended to the buyers such as foreign trips, gold coins, cars etc.

The nutshell is that the buyer is given more than he has invested, thus effectively making his exit from the project without encumbrances.

The icing on the cake is that the buyer is given a “Buy Back” promise. Some builders are calling it “Refuse or Retain” and many such things.

Step 05: Brokerage paid for the efforts
The broker is paid a brokerage for having organized this effort of getting the buyer.

Now, where is the scam in this seemingly innocuous operation?

The scam is as follows.

Home Buying Decision

  1. Over-invoicing: The financial institution’s money (which is public money) is being loaned at a value which is way higher than the actual price of the asset. Thus an insufficient securitization of the loan is created. The Banks/NBFC complicity or lack of due diligence cannot be ruled out.
  2. Flouting of Government norms: In the event of a ready to occupy the property, it is mandatory that the property is duly conveyed to the buyer and the government is paid the stamp duty and registration charges. In such an eventuality the buyer would be asked to pay the complete margin money which would result in the scheme not attracting buyers. The NBFC and the Builder are effectively causing wrongful losses to the government.
  3. The Buy Back promise: The Financial Institute is kept in dark about the buyback promised made to the buyer. The Builder does not officially disclose this promise to the loan extending entity and thus creates a situation which jeopardizes the entire arrangement. Though it is highly unlikely that the financial institution is unofficially not aware of the buyer-builder arrangement.
  4. Allowing the buyer off the hook: All loans work on the idea of the borrower also bringing in his share known as the margin money except for small ticket personal, credit card loans etc. The share is known as the “Margin Money”. The margin money is meant to protect the lending entities interests by acting as a cushion in case of buyer defaults, a price reduction of the asset and such cases. Now if the financial entity takes the entire exposure based on the partial payment of the margin money by the buyer the entire idea of the safety of Bank/NBFCs money gets defeated.

AN EXAMPLE

To further elucidate the point for those of you who have time please search for a product which is being offered in Gurgaon on the Golf Course Extension Road by a well known not necessarily ethical builder. The product on offer is a So called Luxury Property and the buyback with interest subvention is being offered in conjunction with “India Bulls Home Finance”.Now if the builder has sold around 100 units and taken an overall exposure of around 500 crores under the buyback promise the enormity of the financial disaster can be gauged. So say after 03-3.5 years these 100 buyers demand the builder to perform the buyback, this will create a humungous pressure on the builder to return 500 crores for which he will have no means. The builder is definitely under cash flow pressures else such a scheme would not have been floated in the first place.

Out of these 500 crores, approx. 400 crores would be “India Bulls” money which is its depositor’s money. So if there is a recall notice and the buyers refuse to pay the balance margin money and get the properties registered then “India Bulls Home Finance” will be in thick problem. Is it any surprise that all educated and pundits of finance miss out on such basic logic in 2018, when information is available at the click of a button.

Such scheme is being offered by two well known, again not necessarily ethical, builders in the New Gurgaon areas. Big hoardings in the local area and the online marketing space can be found loudly claiming the benefits of the scheme.

I am very sure that builders in another part of the nation i.e. across major Real Estate markets are engaging in such dubious practice in connivance with unscrupulous bank/NBFC officials.

The overall impact of these schemes would be creating weakly securitized home loans which will result in a spate of defaults. This is another NPA which is in the making, this time in the Home loan retail segment. Hopefully, the National Housing Bank, which is the regulator, will see through these malpractices and bring the erring financial institutes to the right side of the law.

After all, financial institutions are custodians, not owners, of public money.

The possible remedies are.

Property Advisor

1. Better due diligence by the loaning entities to arrive at “Market Operative Price”.

2. Insistence on immediate “Sale Deed” of the property being loaned.

3. Increase the margin money from the standard 15-25% to 35-40% in case of big-ticket properties.

4. Loan advancements only when the buyer has paid the entire amounts towards the margin money.

5. Ask for clear declarations and indemnities from the builders that the buyers are not being offered to buyback promises. Blacklisting of builders who engage in such false declarations.

6. Additional collaterals and guarantees from the buyers and builders in subvention schemes.

I am afraid that the banks/NBFCs are participating in yet another scheme of things which will cause losses to unsuspecting depositors and shareholders.