The real estate sector is in choppy waters and the RBI’s move is being seen as an attempt to shield the country’s banking structure from grave risks such schemes pose to the financial health of banks.

At present, a large number of real estate companies use such schemes to lure buyers. In the 80:20 scheme, for instance, a buyer pays 20 percent of the value of the property upfront while the remaining 80 percent is given out by banks on behalf of the buyer. The builder uses this amount to finance the under-construction project, in turn paying interest to the bank on behalf of the buyer.

Instead of opting for such upfront disbursal of home loans, the RBI has now asked banks to link disbursal of home loans to stages of construction to protect both interests of buyers as well as to ensure that the risk of such loans turning bad for banks is minimised.

While the move will act as a safety net for banks struggling to recover a huge chunk of their loaned money, for home buyers it comes as a mixed blessing. If one were to look at the impact of the move on home buyers, it is important to differentiate between the short-term investors and long-term investors/end-users.

In the present scenario, buyers who opt for down-payment under the 80:20 scheme can benefit from the 10-12 percent discount that builders offer. In addition, buyers have to pay equated monthly instalments (EMIs) starting from day one. This is an advantageous proposition for long-term investors/end-users who wish to keep the property for a longer period.

The construction-linked plan, on the other hand, will be costlier for them as the discount offered by the builders will vanish. Further, under this plan buyers will only be able to repay interest till banks give the entire disbursal linked to construction. It is only after the entire amount is disbursed by banks that buyers can begin paying EMIs (which includes the principal amount). This could be a bit of a hassle for long-term investors.

But the plan could be beneficial for short-term investors who plan to sell of the property either during its construction or soon after completion. Reason: they will not have to make a down-payment, which means they will not have to bear costs upfront. Also, buyers in this case do not have to pay EMIs from day one for a property that they do not plan to use and when there is uncertainty about them being able to sell it. It would be cost-effective for them to repay only the interest amount instead of having to bear an additional expense of repaying the interest amount as well.

The RBI’s move to do away with the upfront disbursal of loans would also hit the demand for home loans, which has already slowed down owing to the recent increase in interest rates by banks. However, experts point out that high interest rates are only a temporary measure and they will come down as soon as the economy is back on the growth track.