EMI Holidays: India's Subprime in the Making

An eerie trend is rearing its ugly face as builders get desperate to prop the flagging sales of apartments. In an echo of what caused the subprime crisis in the US, builders are now luring home buyers with loan options that resemble the exotic mortgages of the US.

Trends reported in Delhi point to EMI holidays, where you book an apartment by paying 10-15% down payment of the apartment's cost - determined by the builder - and arrange for your bank loan. Once you have your bank loan in place, the interest component would be paid by the builder until the flat is ready. Once possession is handed over, usually 18-24 months, you begin paying the balance EMIs.

Even in a seemingly straightforward home loan industry in India, loans can take on subtle flavors not easily visible to the borrower. There are all kinds of caveats loaded in to the agreements which emerge only in the event of a dispute. The EMI itself comprises a capital component and an interest component, which is determined by the bank.

Typically, an EMI holiday means no EMI is to be paid by the borrower until the possession of the apartment is given. This basically means the borrower does not have to pay the capital component until the apartment is in his possession. This non-payment of capital will obviously attract an interest which will be calculated and added on to the balance EMIs, which kick in after possession - there is indeed no free lunch. Home loan borrowers are seldom clear about the underlying structure of these loans.

Now, as far as the interest component of the EMI goes, this would be 'happily' shelled out by the builder. At 10% per annum, it is a steal for all builders, who now have ready access to the cash, since under RBI regulations, real estate funding is not automatically available from domestic banks.

EMI holidays have apparently impressed local Citigroup analysts, Ashish Jagnani and Aditya Narain, who have written glowing reports that such ideas would boost transaction activity. Perhaps they should consult their global chief, Vikram Pandit, who is sulking and brooding about how to make good the $400 writedowns Citibank had to endure, arising from similar kind of loans, which the bank had encouraged in the US.

In my view, EMI holidays are an indirect way of providing builders with funds, and an means to keep housing prices at current ridiculously high levels. Since the RBI has tightened its noose around banks lending for the real estate sector, they have come up with such schemes which contravene the law without transgression. Reports say that such trends are mostly a Delhi phenomenon, but this is not entirely true. HDFC Bank in fact offers a similar scheme for Nahar's Amrit Shakti Project in Powai, Mumbai. [Read the story here]

Experts and industry watchers have clearly sent out the message that EMI holiday schemes are simply a ruse by builders to sell their current inventory of apartments at exorbitant prices. Once you take a loan, home buyers would simply find themselves locked on to a rate, and with the prospect of a decelerating market, it is clear that anyone who buys property at current rates is looking at years of sliding property values.


Read the HT story here

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