10 August, 2015

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What is Interest Subvention Scheme–How Does it Work in Real Estate and Government’s Policy Making

What is Interest Subvention Scheme – How Does it Work in Real Estate and Government’s Policy Making

The literary meaning of subvention that is guarantee for financial support clarifies the point to an extent. Interest subvention is hence the subsidy offered on interest rates. For instances, interest subvention is offered on several lending schemes by the government to promote a particular industry

Under the interest subvention scheme, exporters are provided credit at subsidized rates by banks which are later compensated by the government. Loans at subsidized rates will help exporters boost shipments as the country's exports stayed in the negative zone in the past seven months.

To give a fillip to exports, the Commerce Ministry has moved a Cabinet note on a proposal to provide cheaper credit access to exporters from various sectors under the interest subvention scheme. "We have moved a Cabinet note on the interest subvention scheme for inter-ministerial consultation. I hope the scheme should encourage exports," Director General of Foreign Trade (DGFT) Pravir Kumar told PTI.

Last week, Commerce Minister Nirmala Sitharaman had told Parliament that the interest subvention scheme for various sectors was under consideration of the government. The previous interest subvention scheme was available up to March 31, 2014. For the seventh month in a row, India's exports fell 15.82 percent in June to USD 22.28 billion.

How Does Subvention Works In Real Estate

There are three parties-the buyer, the banker and the developer. The buyer books the property by paying 5-30% money upfront. The rest is paid by the bank in the form of loan to the buyer. The bank disburses the loan to the developer as construction progresses. All this is routine. The most important aspect is that the developer bears the interest cost till possession or for a fixed period mentioned in the buyer-seller agreement.

This seems a good scheme for those who stay on rent as they don't have to bear the burden of both loan equated monthly instalments (EMIs) and rent while their house is being built. Also, as the developer is bearing the interest cost, it has an incentive to finish work on time. This is an added advantage for buyers at a time when project delays are so common. According to data from Liases Foras, a real estate research firm, only 29% projects in the national capital region were on schedule in June this year.

Earlier, banks used to pay the full loan amount to developers upfront. Last year, the Reserve Bank of India, or RBI, asked banks to link payments to the progress of construction. Earlier, a buyer could book by paying 20% amount. Developers used to get the rest 80% from the bank upfront and bear the interest cost till possession. But in this system, the risk was on the buyer as the loan was on his name.

Also, the developer got all the money straightaway and had little incentive to finish the project on time. In case of any delay/default, it was the buyer who got into trouble. To reduce these risks, the RBI directed lenders to disburse loans according to construction milestones.

Why Developers Go for These Subvention Schemes

In view of tight liquidity, with banks not willing to lend directly to developers, such schemes provide builders access to funds, and that too at a low rate. It also helps buyers, who do not want to commit a big sum upfront as project delays are nowadays common.

By CA Ankit Gulgulia (Jain)

ankitgulgulia@gmail.com | +91-9811653975


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