Nurturing Subvention Scheme for the Indian Home Loan Market.

With demand for housing reaching pre covid levels by the end of this year, the market is expecting the relaunching of the subvention scheme. This is a tool to provide the necessary relief to the buyer and seller.

What is Subvention Scheme?

The subvention scheme is a tripartite agreement entered into by the buyer, the seller and the financial institution that provides the loan. The scheme benefits both the buyer and seller in a way that the buyer starts to pay the EMI only when he gets possession of the property, while the buyer benefits from the demand for homes due to this facility. In reality, the buyer pays 15-20% upfront, and the bank interest is borne by the developer, till the project is ready. The bank in the meantime pays the amount in full to the developer on behalf of the buyer.

Why did the Government end the Subvention Scheme?

The Subvention Scheme saw demand for home loans reach high levels, but on the ground frauds and complaints were keeping on coming in. The reason was that Developers who got access to the full purchase value from the banks and buyers entered into multiple projects and got lost in the tide of overruns. A single project could have a cascading effect on other projects under the same developer. Thus, many home buyers got affected across the country with large developers like DLF and Unitech defaulting on projects and delivery schedules. This led to many homebuyers being owners of properties that would probably not see the light of day. Also, the banks held the buyer responsible for delayed projects where actually the developer defaulted and moved off with the money. As a result, in 2013 a ban was imposed on the Subvention Scheme by the government of India. Now a plan is afoot to reintroduce it with a change where the banks pay the developer with the progress in the project rather than paying the full amount in advance. 

Subvention VS Subsidy

The difference between subvention and subsidy is important. Subvention is a relief from additional money being pulled out from a buyer at a time. The idea is not to burden the buyers with EMIs so long they are on a rental. They start paying for EMIs after taking possession of their new homes. So, in subvention, the money is not discounted nor given gratis. It is a home loan taken from a bank in lieu of interest, but with a differed EMI, till he takes possession of his property. Subsidy meanwhile is discounted, or a certain amount is waved off. That amount is absorbed by the government to financially support middle-class home buyers and home rent payers.

Advantages of Subvention Scheme

• The buyers don’t get drained of resources to own a home, if on monthly rentals. The EMI on possession acts as a rental but the end result is, owning a home. 
• The sellers get their money from the bank and the upfront money the buyers pay helps in the quick completion of the project. The seller is able to raise the demand for the project and add to the sale turnover. The effect leads to more homeowners being added across the country. This leads to an economic boom for the country.

Disadvantages of Subvention Scheme

The reason explained why the government banned the scheme in 2013 has been explained above and is the main disadvantage. Too many defaulters made the scheme lose its sheen and the burden passed on to home rental payers which boomeranged to becoming an investment bubble rather than a solution.

Subvention Scheme in a new Avatar

There is a possibility of the subvention scheme being reintroduced to Indian home buyers. However, this time round some sort of control to check defaults would probably be given more weightage. Maybe a time-bound payment by the loaning bank, based on a percentage of construction development, would be implemented.

Summary:

With a sluggish economy being witnessed in the present scenario, due to the pandemic and overall inflation due to the war, perhaps a relook into the subvention scheme is necessary. The government will do well to infuse demand and create jobs in the real estate sector. However, the disadvantages that crashed the system needs to be kept in mind and new methods for checks have to be put in place so as to drive ethical demand. Many hardworking citizens deserve homes and this seems the only win-win way to afford one.