Liability of Borrowers under Subvention Schemes: No EMI until Possession.
We come across various advertisements and hoardings by builders that lure prospective home buyers’ attention with slogans like “Buy now, pay later!” or “Pay 15% now & rest after possession.” These screams by the developers are "subvention schemes" and are utilized by the developers to lure prospective buyers.
In India, owning a home is a dream-come-true for many middle-class families, which cannot be accomplished in their salary as most of them stay in rented properties. These schemes provide incentives to both the buyer and developer. A developer aspires to consummate the project within a short period so that less interest is levied upon, and buyers tend to get timely possession of their homes. Hence, both the needs of developed and homebuyers are concomitantly served. But nowadays these schemes are being widely used as a weapon to defraud homebuyers and to siphon off their hard-earned money.
WHAT IS A SUBVENTION SCHEME?
On the face of it, subvention schemes seem like a prerogative for home-buyers, who often lack the requisite funds required for purchasing the property. Subvention schemes basically work on a tripartite model where the buyer, the bank, and the developer are under one binding agreement. A certain requisite ‘booking amount’, which usually is of the range of 5-20 percent of the total sum of the property’s worth is paid upfront by the home-owner. Further consideration amounts are covered by the bank as a loan.
The loan, however, is paid back to the bank in EMIs or Equated Monthly Installments. This happens in two phases, which establish the liability of the builder and the buyer-
Builder Payment (or Pre-EMIs) - As long as the construction of the project in which the property is booked is ongoing, it is the builder’s responsibility to pay the EMIs. The baseline here is that this payment is to be done until the possession of the property is given to the homebuyer.
Buyer Payment (or Regular EMIs) - As and when the buyer receives the possession of the flat, the responsibility of the EMIs falls on his/her shoulders.
Such agreements or schemes bring a sense of discipline and motivation in builders to complete the construction work within the agreed time period, as they get paid by the bank as per the extent of the construction work effectuated by builders, and also so as to relieve themselves from the burden of paying the loan interest. The catch comes into the picture when the buyer defaults in his assigned duties as per the agreement or scheme.
SUBVENTION SCHEME A 'TRAP' FOR HOMEBUYERS
The liability under subvention schemes isn’t as black and white as it seems, and this is the reason subvention schemes have been under scrutiny for a while now. With mismanagement and cases of corrupt practices, RBI intervened in 2013 to regulate such schemes floated by various bans, wherein, before 2013 the money was given in a chunk to developers. RBI sought to change the same and as of now the construction stages and conditions decide the merit of the loan amount. However, despite this measure, the procedure is not full-proof.
Nowadays subvention scheme is being widely misused by developers to defraud buyers. The stumbling block of this scheme comes to the front when the real state developer defaults or the project gets delayed. The ultimate victim of all these mishaps or formulated situations is the home buyer. In all such circumstances, the buyer suffers greatly as the loan availed from the bank in his name and the onus of paying also shifts on him. In addition to this builder's non-payment or late payment of EMI can destroy the credit score of a homebuyer as the loan is in his name. Once the credit score is destructed, it might restrict the borrowing limit of the buyer.
Usually, in the subvention scheme agreements, a "shifting liability clause" exists and it is due to this very clause that often developers get away with fraudulent management of money. This clause states that as and when the builder defaults in paying the interest to the home loan, it is the home-buyer who would have to bear the liability of repaying the said interest. Hence, the entire argument of subvention schemes benefiting home-buyers becomes redundant.
Further, if the subvention period is mentioned as a fixed duration and not till the date of possession, then in that case if there is a delay for completion and even if the buyer has not obtained possession the burden of EMI will commence. Even if the developer agrees to pay, he might subsequently increase the price of the property in most cases, and the buyer may have to pay a premium of 10- 15 %. In some cases, this may be more than what the developers pay as actual interest.
Although the buyer is indirectly contributing to the pre-EMI interest in the form of the premium price for the property, he can claim the tax benefit only on possession or the date from which his EMI payment commences.
Thus, a subvention scheme may turn out to be a double-edged sword, as in all cases, the burden of both rent and EMI will have to be borne by the homebuyer. With the whole analysis, it can be concluded that in all cases the buyer would be the ultimate victim who would be harassed.
CAUTION FOR HOMEBUYERS
Before opting for a loan under the subvention scheme the buyer should be cautious of choosing the scheme. As his hard-earned money and credibility will be at stake if the builder or bank commits default in their duties. The buyer should take care of the following points:
The buyer must assure that the property which he is booking is registered under RERA (Real Estate Regulatory Authority). All real state builders must register their property under RERA before initiating a project.
The buyer must scrutinize the ownership details and clearances, approvals, etc which are required for the construction project should be verified.
The financial strength of the builder must also be thoroughly scrutinized by examining his previous records which prominently inculcates the timely delivery of the property, pending lawsuit, uncompleted project, etc.
The homebuyer should also investigate the credibility of the banking institution.
The various payment schemes available in the market should be evaluated to select the one that is most suited for the buyer.
One should check the promised possession date in the documents and the penalty to be paid by the developer if the project is delayed. In case of delay in promised possession date, whether any clause mentioned as to who is going to pay the penalty.
One should check the presence of the "shifting liability clause" in the agreement, and must evaluate the extent of the same.
The buyer must examine the terms & conditions of the tripartite agreement executed between the builder, the homebuyer, and the bank in depth.
Since banks have authorized the property and the plan, this doesn't imply that buyers ought not to do the requisite legal, technical, and financial due diligence of the developer and the project. A positive due diligence report will guarantee the security of your speculation and tranquillity of mind.
RAY OF HOPE FOR HOMEBUYERS
The biggest revolution in the sphere of subvention schemes was the judgment passed by the Hon'ble Supreme Court in the case of Bikram Chatterji and Ors. Vs. Union of India and Ors. The developer, here, the Amrapali group, liquidated about 50-100 percent of the loan amount while assuring the home-buyers that their possession would be handed over to them in a stipulated period of 36 months. However, despite an unreasonable delay, no such possession was handed over. Worse, the developer failed to pay both the lease of the land and the interest over the loan procured under subvention schemes, leaving home-owners without property or revenue. After quite some struggle, and quite a lot allegations and arguments, the Hon’ble Supreme Court culled out the following loopholes and errors in the entire debacle of subvention schemes, loans, and defaulting-
The lack of due diligence by the bank was brought into question and was thus established, that before pursuing the buyer for interest pendency, it is crucial for the bankers to ensure that they performed due diligence and inspection at the time of sanctioning the loan.
The principle “fraud vitiates everything” is clearly attracted and it is the duty of the Court to not only save the homebuyers but also ensure that they are not cheated. Thus, the liability to pay the EMIs cannot be shifted solely and exclusively to the homebuyers in the light of such unreasonable subvention schemes.
These two landmark points stand to aid home-buyers in lessening their liabilities when it comes to the burden of interest repayment. After the said judgment, it was the banks and financial institutions whose burden was increased in terms of performing due diligence. Thus, the home-buyers, cannot be compelled to pay the interest or the loan or even the EMIs to the bank which has been defaulted by the builder- if the lack of due diligence on part of the bank is established conclusively. As of now, apart from the Consumer Protection Act (2016), the home-buyers can also seek remedies under RERA, 2016.
A subvention scheme is undoubtedly a boon for homebuyers who are not capable of paying requisite payment at one go and are living in rental premises, assuming the builder provides them possession on time. With prevalent misuse, no one is in a position to label subvention schemes as boon or curse, but the prospective homebuyers must examine each project with caution and then take a call.
 “Subvention Scheme: A Scam or A Boon!” by Shweta Gupta available at: https://taxguru.in/finance/subvention-scheme-scam-boom.html  Anil Tayal, Director and CEO of Informage Realty guides homebuyers, https://www.businesstoday.in/magazine/real-estate/story/interest-subvention-scheme-home-property-loans-real-estate-144722- 2015-01-19.  2019 SCC OnLine SC 901.
Research work required for this article was completed by: Prachi Tripathi (2nd Year, FOL, Jamia Milia Islamia), Ashlesha Pandey (1st Year, HNLU), and Apurva Srivastava (2nd Year, RGNUL), all being Interns at S&D Legal Associates.