The Cabinet approval to treat homebuyers as financial creditors under the Insolvency and Bankruptcy Code 2016 (IBC) is likely to give more protection to property buyers and boost consumer confidence, say experts.
Homebuyers were so far treated as operational creditors, and were given the least priority in the process of liquidation of a defaulting builder, after financial creditors such as banks.
However, once the proposed changes are incorporated in the IBC, homebuyers will have the right to initiate a resolution process against builders to get their money back, just like financial creditors.
"This move will grant home buyers equal priority as banks and other institutional creditors while recovering dues from stressed or insolvent realty firms," said Ramesh Nair, chief executive offier and country head, JLL India.
CBRE South Asia executive director and head, valuation and advisory services Vamshi KK Nakirekanti said If homebuyers are treated fairly in terms of their interests in addition to financial creditors, the real estate sector will move closer to becoming more transparent and accountable.
"This in turn will boost investor confidence, and many consumers may be positively motivated to buy houses leading to highly awaited investments in the real estate sector," he added.
The NCR division of builders' body Credai said this move will instill a sense of confidence amongst buyers of under construction property, for continued flow of institutional and bank credit to the real estate sector.
"However, the system must uphold the superiority of a bank mortgage over any other claim otherwise banks may become hesitant in lending to this sector," said Pankaj Bajaj, president, Credai NCR.
Anuj Puri, chairman, Anarock Property Consultants, said to be truly relevant, the entire implementation process needs to be clarified to homebuyers.
"They need to know how exactly they will be represented in the creditors' committee in other words, whether the NCLT will appoint a resolution professional to represent their rights and interests," he added.
The vice chairman of another pan-India builders' group Naredco, Parveen Jain, said that buyers will now have some guarantee or something to fall back upon as the case may be accordingly if they are treated as financial creditors.
Rating agency India Ratings, however, opined that this amendment could be credit negative for the lenders of real estate developers since the recovery proceeds will now have another layer of distribution, which was not factored in at the time of giving the loan to the builder.
"This would effectively increase the realised haircuts for the financers. In other words, without changes in probability of default, loss given default (LGD) could increase for the financiers," it said.
The agency added that housing finance companies could get some comfort as buyers' rights over a defaulting builder and cash flows on liquidation will enhance.
"Eventually, with increasing customer confidence there will be more takers for home loans, benefiting housing financiers," it said.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)