Financial Integrity in cheapest form of Real Estate Finance

Banks are custodians of public money and therefore their responsibility is as important and big as that of the Armed Forces. The Armed Forces are responsible for the physical integrity of the nation and the banks are responsible for the financial integrity of the nation.While banks over a period have improved the retail lending practices and processes, there are still are lots of loop-holes in the Home Loan / Loan against Property category.

For the Real Estate industry, the Home Loan and Loan Against Property are still the cheapest forms of finance available.

The banks still extend a lot of risky loans in the retail Home Loans segment. This happens, either in complicity with the industry and/or due to carelessness and/or naivety.

The results are risking public money, creating false demand, making promises to buyers which are routinely broken. These result in disputes and litigations, creating fissures in the financing of the Real Estate industry, so on and so forth.

Fraudulent practices in Home Loans / Loans Against Property

Some of the blatant fraudulent practices which happen in Home Loans and Loans against property are.

Real Estate Consultant

1. Profile Funding: The industry routinely engages in this practice wherein the builders sell the same property to multiple buyers to raise funds based on their profiles. Since in NCR the registration/conveyance happens only after completion of the project, hence the mortgaged security with a bank is the “Industry Buyer Agreement”. Now since the industry is at free will to print as many the industry buyer agreements as possible, they can make the same flat or the same buyer raise Home Loans through various banks.

A possible remedy is that banks coordinate amongst themselves to track data of the flats sold besides the parties raising loans. Another possibility in the RERA regime is to coordinate with the regulator to find the exact apartments sold and reported by the industry.

A strong precautionary step should be to insist on registration of the builder buyer agreement, as an intermediate step before registering the sale deed.

2. Parallel funding: One buyer is made to buy multiple properties at the same time. Thus the industry gets a Home loan file logged into various financial institutes at the same time and thus succeeds in raising loans even before the same is reported in individual CIBIL Score. Again, the industry can print multiple industry Buyer Agreements and execute the fraud.


In this scheme, the buyer is made to raise a home loan which is way beyond, at times 3-4 times, his actual eligibility to raise home loans.

A possible remedy is closer coordination amongst lenders.

3. Subvention Scheme: It is a perfectly legitimate instrument abused by the industry to the hilt. The subvention schemes were designed with a three-pronged objective, one to provide bulk money to the builder, to shift the interest burden from the buyer to the builder thus incentivizing the builder to complete the project, and third, the banks benefited by collecting the subvention time period interest upfront thus both reducing risk and bolstering profit.

The caveat is that Subvention is a fixed period arrangement i.e. 12 months, 18 months and in some cases 24 months. The builders mostly advertise it as “subvention till possession” and usually keep silent on the tenure of the Subvention as decided by the bank. This is in effect a gross misrepresentation and jeopardizes banks credibility.

Therefore, when extending loans under the subvention scheme the financial institutions must take undertakings from the Developers and the Buyers clearly stating the tenure of the subvention scheme.

4. Construction Linked Plans and Loans: This is a very interesting area in Real Estate and is usually projected as something which is buyer friendly and by extension safe for financial institutions.

Home Buying Decision

Now the way the construction linked payment plans are structured they are anything but that. Mostly there is no linkage between the construction and payment plan except for symbolic stage wise linking of demands.

A real estate project’s price is essentially a combination of land, approvals, construction, admin & marketing costs, promoter’s profit. So, banks should insist on financing the construction and admin/marketing costs during the development phase and the balance should be paid on the completion of the project. Hence an ideal payment plan is something which collects 40-50% of the price at the time of completion of the project. This mitigates the risk to the buyer and the financial institution.

5. When there is a Construction Loan & other Encumbrances: In this situation, it is seen that lending is done more than that should be done. Banks before creating a second charge on the property must limit the exposure by auditing the deployment of the loan raised. Also, to keep the construction loan properly indemnified the banks should insist certain percentage of the inventory is not sold until the time the construction loan is not paid off.

In addition, the banks must withhold some percentage of the home loan to be disbursed and link it to project completion to avoid overexposure by double financing the developer through construction and home loans.

6. Margin Money: A basic concept of the financial industry is to create a margin of safety so that the buyer has skin in the game. In aggressively priced & luxury projects the margin money should not be less than 35-40% of the property price.

In the event of a market price correction the luxury segment witnesses one of the sharpest fall.
Similar is the case with distant and upcoming locations. For projects in these locations also the margin money should be at least 35-40% of the total price.

Under no circumstances should the financial institutions advance more than 80%. Some financial institutions are advancing up to 90% price of apartments in Affordable” housing segment. Such loans are risky and should be avoided.

7. Overstretched and complex corporate structures: Financial institutions should be very skeptical in extending home loans to Developers who are overstretched i.e. who have a large number of uncompleted projects.

Most of the time these builders use a lot of ingenious accounting practices to move money from one project to another. One doesn’t need to even move money as the same effect can be achieved by having common suppliers and vendors.

Though in financial terms, this kind of capital shifting becomes very risky due to lack of project controls, pilferage and spiraling interest costs.

Property Advisor

It is like a big ship with too many holes. The crew closes one and the ship gets inundated with another leak.

8. Misrepresentation under PMAY: The government of India has extended interest subsidy to a certain segment of home buyers. There are reported cases of Developers and buyers colluding to avail this subsidy by misrepresenting facts.

Since this would be a direct loss to the government exchequer it would be imperative that in the event of Developers and buyers found colluding for availing this facility by misrepresentation strictest legal provisions are invoked against such erring entities.

This is just a representative list. Given the unsatisfied need for Capital, the Industry will continue to be adventurous and ingenious to circumvent the system; hence for the financial institutions’ caution and skepticism are the only way ahead.