Home loan subvention schemes were once aggressively marketed by real estate developers as an attractive way for buyers to purchase homes without the immediate burden of monthly EMIs. Advertisements often promised “No EMI till possession”, “Builder will pay your EMI” or similar benefits.
Under these arrangements, a homebuyer, builder/developer and bank or housing finance company generally enter into a tripartite arrangement. The buyer obtains a housing loan, the lender disburses the loan amount, and the developer undertakes to service the pre-EMI or EMI for a specified period or until possession.
While such schemes may appear financially convenient, they can expose homebuyers to significant risks if the developer defaults, the project is delayed, construction remains incomplete, or the bank seeks repayment from the borrower.
The risks associated with such schemes have received renewed judicial attention, particularly in the Supreme Court proceedings concerning homebuyers who became liable for loan payments after developers stopped servicing their EMIs.
What is a Home Loan Subvention Scheme?
A home loan subvention scheme is a financing arrangement in which the developer agrees to bear the interest, pre-EMI or EMI payable on a home loan for an agreed period.
The arrangement generally involves three parties:
- Homebuyer – purchases the residential unit and becomes the borrower.
- Builder/Developer – sells the property and agrees to service the buyer’s loan for a specified period.
- Bank/Housing Finance Company – sanctions and disburses the housing loan.
The arrangement is commonly documented through a tripartite agreement or, in some cases, related bilateral or quadripartite arrangements.
For example, suppose a flat costs ₹1 crore. Under a typical 20:80 subvention structure, the buyer may initially contribute approximately ₹20 lakh while the balance is financed through a housing loan. Depending upon the terms of the scheme, the developer may agree to pay the interest or EMI on the financed amount until possession or another specified date.
The exact financial structure, however, varies from project to project.
Why Were Subvention Schemes Popular?
The primary attraction was the reduction of the buyer’s immediate financial burden.
A conventional under-construction home loan generally requires the borrower to service pre-EMI or EMI obligations as the loan is disbursed.
Under a subvention arrangement, the developer promises to bear these payments for a specified period.
The scheme therefore appeared attractive because:
- The buyer could purchase a property with a relatively smaller initial contribution.
- The buyer did not immediately have to bear the full EMI burden.
- The developer could attract buyers by advertising “zero EMI till possession”.
- The bank obtained a home-loan customer and the developer obtained access to institutional finance.
- Buyers could potentially continue paying rent while the developer serviced the loan during construction.
However, the apparent benefit depended heavily upon the developer actually performing its obligation to pay the EMI/pre-EMI.
How Does a Subvention Scheme Work?
The transaction generally operates in the following manner:
Step 1 – Booking of the Property
The buyer selects a property and enters into an agreement or booking arrangement with the developer.
Step 2 – Housing Loan Application
The buyer applies for a housing loan with a bank or housing finance company.
Step 3 – Tripartite Arrangement
The buyer, developer and lender enter into a tripartite agreement setting out their respective obligations.
Step 4 – Loan Disbursement
The lender disburses the sanctioned loan amount according to the terms of the loan arrangement. In some controversial schemes, substantial amounts were disbursed to developers upfront rather than being strictly linked to construction progress.
Step 5 – Developer Services EMI/Pre-EMI
The developer undertakes to pay the agreed interest, pre-EMI or EMI on behalf of the buyer for the specified period.
Step 6 – Buyer Takes Over Payment
After the agreed subvention period expires, the buyer ordinarily becomes responsible for the loan repayments, subject to the terms of the loan and tripartite agreement.
The critical problem arises when the developer stops making payments before the buyer receives possession.
The Major Risk: Developer Stops Paying the EMI
The biggest weakness of a subvention scheme is that the home loan remains the buyer’s borrowing obligation.
The developer’s promise to service the EMI does not automatically mean that the bank has given up its contractual rights against the borrower.
Therefore, if the developer stops paying the EMI, the bank may demand payment from the homebuyer depending upon the loan documents and applicable law.
This can create an extremely difficult situation:
The project may remain incomplete, possession may not be offered, the developer may stop paying the EMI, and the bank may simultaneously demand payment from the homebuyer.
The buyer can therefore find himself or herself paying:
- Rent for existing accommodation;
- EMI on an incomplete property;
- Interest and other loan charges;
- Legal expenses; and
- Potential penalties or consequences arising from loan default.
Project Delay Makes the Problem Worse
The situation becomes particularly serious when the developer has promised possession within a specified period but fails to complete the project.
Suppose a developer promises possession in 2018 and agrees to pay the buyer’s EMI until possession. If the developer stops paying in 2019 while the project remains incomplete, the buyer may suddenly receive demands from the lender.
The buyer may then be caught between two competing financial obligations:
The developer says the project is under construction, while the bank says the loan has to be repaid.
This was one of the central issues that reached the Supreme Court in the litigation concerning subvention schemes.
Supreme Court Proceedings in Himanshu Singh Case
The Supreme Court has considered a batch of matters involving subvention schemes between homebuyers, builders/developers and banks or financial institutions.
In the proceedings, the Court noted that developers had marketed schemes under which they would pay the homebuyers’ EMIs or pre-EMIs until a specified date or until possession. In several cases, developers subsequently defaulted, while projects remained incomplete and banks began demanding payments from homebuyers.
The proceedings concern projects in areas including Noida, Greater Noida, Gurugram and nearby regions, involving a large number of affected homebuyers.
The Court has also examined allegations concerning the manner in which banks and financial institutions disbursed funds and the safeguards adopted for protecting borrowers.
The Supreme Court directed investigation into the alleged nexus and required examination of whether applicable regulatory requirements concerning stage-linked disbursement and cautioning borrowers about the risks of innovative housing loan schemes had been followed.
The proceedings therefore demonstrate that the problem is not merely a private dispute between a buyer and developer. The manner in which the developer, lender and borrower arrangements are structured and implemented can also raise regulatory and investigative issues.
RBI’s Position on 80:20 and 75:25 Housing Loan Schemes
The Reserve Bank of India has previously cautioned banks about innovative housing loan products involving arrangements such as 80:20 and 75:25 schemes.
The regulatory concern is particularly relevant where the bank makes a substantial upfront disbursement to the developer without adequately linking disbursement to the stages of construction.
Such arrangements can create additional risks for both banks and borrowers, particularly in cases involving:
- Disputes between builders and buyers;
- Default by developers in payment of EMI/pre-EMI;
- Delay or non-completion of projects;
- Upfront or bulk disbursement to developers;
- Diversion of funds; and
- Adverse impact on the borrower’s credit profile.
The important point is that a buyer should not assume that the expression “subvention scheme” means that the buyer has no responsibility towards the lender.
The precise rights and obligations depend upon the loan agreement, tripartite agreement, allotment/sale agreement and applicable regulatory framework.
Does “No EMI Till Possession” Mean the Buyer Has No Loan Liability?
Not necessarily.
This is one of the most important points that a homebuyer must understand.
The phrase “No EMI till possession” is primarily a commercial promise associated with the scheme. It should not automatically be interpreted as cancellation or suspension of the borrower’s contractual liability towards the lender.
A buyer must carefully examine:
- Who is legally responsible for repayment?
- For how long will the developer pay the EMI?
- Is the obligation linked to possession or only to a fixed date?
- What happens if possession is delayed?
- What happens if the developer becomes insolvent?
- What happens if the developer stops making payments?
- Can the bank recover the outstanding amount from the buyer?
- What remedies does the buyer have against the developer?
- Is there a separate indemnity or security from the developer?
These questions should be answered before signing the loan and subvention documents.
Fixed-Date Subvention vs Possession-Linked Subvention
The distinction between these two arrangements is extremely important.
In a fixed-date subvention, the developer may agree to pay EMI/pre-EMI only until a particular date.
For example:
“Developer shall bear the pre-EMI until December 2027.”
If the project is delayed beyond December 2027, the buyer may become responsible for the loan payments even though possession has not been received.
In a possession-linked arrangement, the developer’s obligation may be linked to possession or another defined event.
For example:
“Developer shall bear the pre-EMI until handing over possession.”
However, even here, the buyer must carefully examine the precise contractual language because the meaning of “possession” may be disputed.
Why Upfront Loan Disbursement Is Risky
A major concern with subvention schemes is the possibility of large loan amounts being disbursed to developers before corresponding construction progress.
In an ordinary construction-linked housing loan, disbursement is generally expected to correspond with the progress of construction.
If a substantial loan is released upfront, the buyer’s loan liability can arise much earlier than the physical progress of the project.
This creates several risks:
If large amounts are released before construction milestones, there may be a greater risk of funds being used for purposes unrelated to the particular project.
Risk of Project Delay
The developer may receive significant funding without completing the project within the promised period.
Risk to the Borrower
The buyer may be required to repay a loan even though the property remains incomplete.
Risk of Credit Damage
Failure to service the loan can affect the borrower’s credit history and may create further financial difficulties.
What Happens If the Builder Defaults?
If the builder stops paying the agreed EMI/pre-EMI, the homebuyer should not simply ignore communications from the bank.
The buyer should immediately:
- Check the tripartite agreement.
- Check the home loan agreement.
- Determine the exact period for which the developer agreed to make payments.
- Obtain the complete loan account statement.
- Obtain proof of all payments made by the developer.
- Communicate with the lender in writing.
- Send a formal notice to the developer.
- Preserve all advertisements and representations relating to the subvention scheme.
- Collect the allotment letter, agreement for sale and payment receipts.
- Seek professional legal advice before allowing the loan account to become irregular.
The buyer should avoid relying only on verbal assurances from the developer.
Documents a Homebuyer Should Preserve
A buyer caught in a subvention dispute should maintain a complete documentary record.
Important documents include:
- Application form
- Allotment letter
- Agreement for Sale
- Builder-buyer agreement
- Home loan sanction letter
- Loan agreement
- Tripartite agreement
- Any quadripartite agreement
- Subvention agreement
- Memorandum of Understanding
- Payment receipts
- Bank statements
- EMI/pre-EMI statements
- Developer’s payment confirmations
- Emails and letters
- SMS/WhatsApp communications
- Advertisements promising “No EMI till possession”
- Possession-related correspondence
- Bank notices
- Legal notices
- Project status documents
Advertising material can become important evidence where the developer made specific representations concerning the EMI obligation.
Can the Homebuyer Approach RERA?
Depending upon the facts, a homebuyer may have remedies under the Real Estate (Regulation and Development) Act, 2016, particularly where there is delay in possession, failure to comply with contractual obligations, or other violations by the promoter.
The appropriate forum and relief will depend on:
- The nature of the dispute;
- The project and its RERA registration;
- The contractual documents;
- The relief claimed;
- The conduct of the developer; and
- Whether proceedings are already pending before another authority or court.
A homebuyer should therefore examine the RERA agreement and loan documents together, rather than treating the bank dispute and developer dispute as completely separate matters.
Can the Bank Proceed Against the Homebuyer?
The answer cannot be determined merely by saying that the developer promised to pay the EMI.
The loan agreement and tripartite arrangement must be examined carefully.
A borrower should not assume that the bank has no remedy simply because the developer undertook to service the EMI.
At the same time, where there are allegations of improper disbursement, regulatory violations, collusion, or other wrongdoing, the conduct of the lender and developer may also become relevant to the legal proceedings.
Therefore, a borrower receiving a demand notice should obtain immediate legal advice instead of either ignoring the notice or making admissions without examining the documents.
Precautions Before Entering a Subvention Scheme
A prospective homebuyer should undertake proper due diligence before accepting a subvention offer.
1. Read the Tripartite Agreement
Do not rely only on the developer’s brochure or sales representative.
2. Check the Exact EMI Period
Determine whether the developer’s obligation ends on a fixed date or upon possession.
3. Ask What Happens in Case of Delay
The agreement should clearly address the consequences of project delay.
4. Check the Loan Disbursement Schedule
Understand when the lender intends to release the loan.
5. Verify Construction Progress
The buyer should independently verify whether the actual construction corresponds with the amount proposed to be disbursed.
6. Check the Developer’s Track Record
Past delays, litigation, insolvency proceedings and financial difficulties should be investigated.
7. Do Not Rely on Oral Assurances
Important promises should be incorporated into legally enforceable documents.
8. Obtain Independent Legal Advice
A lawyer should review the sale agreement, loan agreement and subvention agreement together.
9. Understand the Exit Consequences
The buyer should know what happens if the project is cancelled, delayed, terminated or abandoned.
10. Maintain Evidence
Keep every communication concerning the developer’s promise to pay the EMI.
Subvention Schemes and Homebuyer Protection
The fundamental issue is the allocation of risk.
A homebuyer enters a subvention scheme because the developer promises to bear a particular financial burden. But the buyer also becomes a borrower under the housing loan.
Consequently, the buyer should understand that three separate legal relationships may exist:
Buyer–Developer Relationship
This arises from the booking/allotment/agreement for sale.
Buyer–Bank Relationship
This arises from the housing loan documentation.
Developer–Bank Relationship
This may arise from the tripartite agreement, subvention arrangement or other financing documents.
A dispute involving one relationship can have consequences for the others.
Why Homebuyers Must Be Particularly Careful
The marketing language of a subvention scheme can make a complicated financial arrangement appear extremely simple.
A phrase such as “Pay 10% now and nothing until possession” may sound attractive, but the buyer must understand who actually carries the financial risk if the project is delayed.
The buyer should ask one basic question:
“If the builder stops paying tomorrow and the project is still incomplete, who is legally required to pay the bank?”
The answer should be clearly established from the documents before entering the transaction.
Home loan subvention schemes can appear attractive because they reduce the immediate financial burden on a homebuyer. However, the experience of numerous delayed and stalled projects demonstrates that “no EMI till possession” does not necessarily mean “no financial risk until possession.”
The risks become particularly serious when the developer defaults on EMI/pre-EMI payments, the project remains incomplete, or substantial loan amounts have been disbursed upfront.
The Supreme Court’s proceedings in Himanshu Singh & Others v. Union of India & Others have brought significant attention to the problems associated with subvention arrangements and the role of developers, banks and financial institutions.
For homebuyers, the key lesson is simple:
Do not evaluate a subvention scheme only on the basis of the promised EMI benefit. Evaluate the entire financial and legal structure of the transaction.
Before signing, carefully examine the Agreement for Sale, Home Loan Agreement, Tripartite Agreement and Subvention Agreement, understand the consequences of project delay, and obtain independent professional advice where necessary.
A home loan is a long-term financial commitment. A promise by a developer to pay the EMI should never be treated as a substitute for proper legal and financial due diligence.
