SBI Loan — Where the Bank Refunds the Principal If the Builder Does Not Deliver

SBIAre you wary of buying an under-construction property? While under-construction properties are cheaper and offer greater potential for capital appreciation, such properties also come with an element of uncertainty. What if the builder fails to deliver the property on time? Or from what many buyers across the country have faced, the builder fails to deliver altogether? Your money is stuck. You must keep paying the EMI and bear the mental agony. Can this risk be taken care off through a financial product? To an extent, yes.

The State Bank of India (SBI) has launched an innovative home loan scheme (Residential Builder Finance with Buyer Guarantee, RBBG) in January 2020, where some of your concerns could be addressed.

How Does SBI Residential Builder Finance with Buyer Guarantee (RBBG) Work?

Under the scheme, if the developer fails to deliver the project under the stipulated deadline, the bank will refund the loan principal amount to the buyer (home loan borrower). As I understand, the total disbursed amount will be given back (and not just the outstanding amount). The buyer can use the refund amount to close the loan and move on. It is fair to assume that the purchase interest in the property will also be foregone.

This loan product won’t be available for all the projects. The loan will be available for select projects approved by SBI under the loan scheme. You can expect only projects from “reputed” builders to pass the eligibility test. The loan scheme is available for projects with a maximum unit price of up to Rs 2.5 crores. The guarantee works until the project receives the occupation certificate. The completion deadline shall be as specified during RERA registration. SBI must be the sole lender for the project, both to the builder and the home buyers. If you have borrowed from another lender, the guarantee won’t kick in. As I understand, there will be a tripartite agreement between the buyer (borrower), builder and the bank to effect such a structure.

The SBI refunds only the principal amount in the event of default by the builder. As I understand, the entire disbursed amount (not the current outstanding or the sanctioned amount) will be refunded by the bank. For instance, if you took a home loan of Rs 50 lacs under this scheme and the amount disbursed till date is Rs 40 lacs. Due to your regular EMI payments, your current outstanding is Rs 35 lacs. In case the builder defaults (as per the contract), the SBI will refund you Rs 40 lacs. However, the interest that you have paid until then is gone. Moreover, you must have made down-payment to the builder from your own funds. As I understand that money is gone too. Therefore, you will still be losing a good amount of money if the builder fails to meet the deadline. However, this is still much better what many home buyers are struggling with in many parts of the country. They have taken the home loan, paid money to the builder and are paying interest on their loans but their dream house is nowhere close to being delivered. This loan scheme provides you an exit option (at a loss) that can save you from such hopeless situations.

What Are the Pros?

Clearly, there is much greater comfort in going for such under-construction projects. Since SBI must pay if the builder defaults, you can expect SBI to monitor the project progress closely. Even if the worst were to happen, you wouldn’t be left stranded and hopeless. You will get a good portion back and you can move on.

SBI has mentioned that the rate of interest for this loan product will be the same as for a regular home loan. You do not have to pay anything extra. Therefore, the cost of borrowing does not go up simply because of this cushion (even though the borrowing may go up).

What Are the Cons?

There is no free lunch. Since there is greater buyer comfort, you can expect the property to command a premium in pricing, compared to other similar properties. Do not expect too many builders to meet the eligibility criteria. Expect only the most reputed builders to pass the test. And such builders command pricing premium.

Even though you will think that SBI will keep a tight control on the project progress, the record of banks in monitoring the projects is not something to be proud of. As we have seen above, if the  builder defaults, you do not get your entire money back. You still lose the interest paid and the down payment amount. Therefore, you still need to be cautious.

How long does it take to get the refund amount? The definition of default can be very subjective per se. As a buyer, you also need to see how SBI considers the refund of capital.

Under the scheme, the SBI also offers loans up to Rs 400 crores to the builders. It remains to be seen how the defaults will be accounted for. As I understand, the builder refunds the loan amount and SBI, as the banker to the builder, provides the builders with the funds to refund the disbursed amount. Let’s say the homebuyer invokes the guarantee. SBI gives funds to the builder who makes the payment (disbursed loan amount, Rs 40 lacs in our example above) to the homebuyer. Now, this Rs 40 lacs becomes a loan from the bank to the builder and the builder must repay it.

At the moment, there are various unknowns too. Does SBI have project wise refund limits? How long does it take to get the refund amount? What constitutes a default as per the loan contract? The definition of default can be very subjective. Addition or deletion of a word can mean day and night difference between your perception of your rights and reality. You need to understand such finer points too before signing up.

In my opinion, it is good that such a product has come to the market. Though it is at a very small level right now, we can look forward to other banks following suits if the State Bank of India has done it. If other banks start doing it too, it can give serious fillip to the real estate market. Having said that, the problems of real estate are not just limited to delivery of projects but that’s a topic for another day.

What do you think of SBI’s new home loan product?

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