RBI Defends Role in Subvention Scheme Scandal as Supreme Court Probes Builder-Bank Nexus

The Supreme Court of India is examining a major financial scandal involving banks, real estate developers, and subvention housing schemes, after hundreds of aggrieved homebuyers alleged harassment and fraud due to misuse of sanctioned home loans.

Key Highlights:

• What is the Subvention Scheme?
  • In this scheme, banks directly disburse home loan amounts to builders.
  • Builders are required to pay EMIs until possession of flats is given to homebuyers.
  • However, many builders defaulted on EMIs and construction, leading banks to demand repayment from innocent homebuyers.
• Supreme Court Intervention:
  • SC, citing misuse and harassment, has ordered a CBI probe into the ‘unholy nexus’ between builders and banks.
  • It also provided interim relief to buyers:
    • Barred coercive recovery actions
    • Stopped cheque bounce cases against homebuyers
  • SC remarked, “A rich man (bank) gave money to another rich man (builder), and the poor man (buyer) is now left in the lurch.”
• RBI’s Response to the SC:
  • Filed an affidavit stating it has fulfilled its regulatory duties under the Banking Regulation Act.
  • RBI cited:
    • 2015 Guidelines directing loan disbursals to be linked to construction stages — no upfront disbursal for incomplete projects.
    • August 2022 circular on recovery practices, mandating ethical and non-coercive recovery methods by banks and agents.
  • However, it acknowledged banks violated these norms by releasing funds before verifying construction progress.
• Regulatory Gap and Enforcement Failure:
  • Despite RBI’s circulars, banks allegedly ignored norms and enabled siphoning of funds by builders.
  • RBI has distanced itself from direct responsibility, saying enforcement is within the banks’ operational discretion.

Current Status:

• CBI probe underway as per SC orders.
• RBI maintains that it cannot be held liable, while SC is likely to determine the accountability framework across regulators, lenders, and developers.