A former banker had a small victory when he took on a large real estate group and got a court injunction to file a First Information Report (FIR). The FIR is not only against the builder but also against the banks that sanctioned loans. Between the reneging of the commitment by the builder and filing the FIR is a story that I think others fighting the system should know.
For decades, developers colluded with banks to create tripartite agreements with the consumer as the first party. These subvention schemes protected the developer as the loan was not in his name but spoiled the credit scores of consumers in whose name the loan was sanctioned. However, the consumer had no say in when the money was to be disbursed by the bank to the builder or how it was to be used. When the developer stopped paying the instalments as promised, the bank went after the first party, the consumer. The developer continued to get fresh instalments or even new loans from the same bankers.
Making A Move
Consumers like this banker challenged the logic. It was a fight similar to what the Jaypee buyers fought for in the Supreme Court when the company was taken to liquidation. Consumers were never to be part of the repayment under the Securitisation Act. But once they proved that the consolidated payment to the developer by buyers was larger than any bank, they were given the status of financial creditors with powers even to take the developer to court. However, banks have continued to persecute buyers who have paid their money but not got their homes.
The banker decided to study law to take on the corporate giants. The situation was not going to change drastically while he studied the ins and outs of law to be his own champion. In December 2020, in an online hearing, the Patiala House Courts ordered that the FIR should be registered against the builder as well as the banks that sanctioned the loan, knowing that the titles of land were not clear. Also, the bankers did not do their due diligence about project stages and continued to lend to the builder, despite written protests by buyers.
Note that the celebration here is only about being able to file an FIR against lenders who colluded with developers. Solutions are still far away.
Lenders Challenged
The role of lenders has been challenged by different fora. Take the case of Supertech Hues and Haryana Real Estate Regulation Authority (HRERA) where in 2020 the Rera Regulator KK Khandelwal, prevented the project lender PNB Housing Finance from taking the builder to a SARFESI court for liquidation. Between the lender’s rights to recover the dues and the builder and his project, were 900-odd buyers who had also been given retail loans by several banks. In a similar case, HRERA Gurugram asked the Bank of Baroda to stop the auction of a commercial project in Sector 109, without settling buyer dues.
Banks now have to consider buyers' interests when making real estate lending policies. The Real Estate Regulation Act was a game changer. Several RERA authorities have taken to interpreting the role of lenders vis-a-vis buyers.
The Supreme Court’s order that the cap of the rate of interest to 8 per cent on delays in payment to Noida and Greater Noida authorities applies only to Amrapali, will also start another wave of protests by consumers. Now all other builders with pending dues will have to pay dues at higher rates of interest. The total amount owed to the authority is almost Rs 40,000 crore. Till this amount is paid, over 100,000 buyers cannot register their properties because occupation certificates have not been granted. Many have moved in with a signed fit-out possession agreement in the absence of an occupancy certificate.
Because of this they cannot re-negotiate their existing loans, many from non-banking financial institutions (NBFCs), which were sanctioned at much higher rates. These cannot be shifted to scheduled banks till the dues are paid. The reschedulement policy of the Noida and Greater Noida authorities concludes on March 31.
Chief Minister Yogi Adityanath of Uttar Pradesh has assured buyers that he would help solve their problems. But the banking system also needs to become more transparent in lending to real estate. When lending to a project, the lender takes the property papers and keeps them in safe custody. How can the due diligence not show that some portions of land were not in the builder’s name? When a retail consumer takes a loan from a lender, the papers for that unit are with the retail lender. If the project goes into liquidation, do both lenders have similar rights? Also, the consumer purchased a good using borrowed money. Where does she stand in this entire equation? Where does the lender’s due diligence falter and what are the consequences for that faltering? Consumers are standing up and demanding answers to these questions and very soon, lenders and regulators will have to address them and create laws that are equitable to all.
E Jayashree Kurup is a writer/researcher on real estate. She is Director, Real Estate & Cities, Wordmeister Editorial Services. Views are personal, and do not represent the stand of this publication.