Treatment of home-buyers at par with the financial creditors during the insolvency proceedings of bankrupt real estate developers is a positive to shore up the confidence for home buyers and the real estate sector over the medium to long term.
The Cabinet, on May 23, 2018, has approved amendments to the Insolvency and Bankruptcy Code (IBC), as suggested by the Government appointed panel. The details of the amendments that are approved are not yet disclosed as the final approval is pending with the President.
However, the government’s appointed panel suggested one of the major changes to the law that home buyers should be treated at par with the financial creditors during the insolvency proceedings of bankrupt real estate developers and the same has been acceded.
This is a welcome move for home buyers which will help them recover their investments from insolvent developers, while placing them at par with financial creditors.
Earlier, the homebuyers were merely regarded as consumers while filing their claims against bankrupt developers and there was no clarity regarding their standing for the recovery of their hard-earned money. The question frequently asked was if the homebuyers were not categorized as financial creditors, then when would their dues be recovered?
There were all the chances that they would lose to financial or operational creditors in recovering their dues during insolvency proceedings. The amendment would place homebuyers at par with the financial creditors which would allow them to recover their dues along with banks/financial institutions.
Mr. Shubham Jain, Vice President and Sector Head, said: “Treatment of the home-buyers at par with financial creditors is a huge relief for the buyers, especially where there is no visibility of delivery in sight. Correspondingly, delinquencies for HFC’s focused on retail home loans may remain under check given that the buyers will have some hope of recoveries. This is a big confidence booster for the consumers who should feel more protected and will surely underpin the on-going consolidation in the sector and bring in transparency.”
Under Real Estate Regulatory Authority (RERA) Act, there are restrictions on withdrawal of funds collected from customers by way of having separate accounts for each project which along with the other added protection for home buyers like penalty on developer/promoter for delay in project etc act as an enabler for the industry by creating a positive environment.
Therefore, measures that build upon the confidence of the consumers and promote transparency in the sector will create better operating environment for all the stakeholders.
As on December 31, 2017, retail home loans accounted for around 67% of the loan book of HFCs while the balance 33% constituted of construction lending, LAP financing etc., as per ICRA research.
Thus, ICRA believes that the financial creditor status accorded to the home buyers is a positive for the HFCs, although the benefit is partially offset because of the higher hair-cut the lenders may be required to take on the construction lending book. Consequently, the perceived lower recoveries from the construction loan book may result in repricing of the loans to the real estate developers, which may result in higher interest burden for them.
Besides issues like will the home buyer be considered at par to a secured financial creditor or unsecured financial creditor and what role will the aggrieved buyers’ cohort have in the committee of creditors remains to be seen. Nevertheless, ICRA believes treatment of home buyers at par with financial creditors is a big positive for the real estate sector for the long-term growth of the sector.
