Supreme Court bats for homebuyers over bank; time govt did more

It has become common for builders to abandon projects midway and leave both homebuyers and financiers in the lurch. This is of a piece with what has come to be known as the jingle mail phenomenon in the USA.

In the US, in the absence of the right to proceed personally against the borrowers, all that financiers can do is to seize the mortgage property, sell it and recover their dues. This is indeed the very rationale for banks seeking mortgage of the very property to buy or construct which they have lent.

This protection proves inadequate in a falling property market. In the US, what triggered the cataclysmic financial crisis in 2008 that rocked the entire world for a long time was the borrowers sending in jingle mails to their lenders saying they are no longer able to pay their EMIs. For good measure, such mail-packets would also contain the key. The resultant jingling sound it made gave rise to the wickedly appropriate description---jingle mail---for such gay abandonment of responsibilities by borrowers, secure in the knowledge that their personal assets cannot be touched by the mortgagee.

Builders in India, perhaps taking a cue from the US borrowers, have been similarly abandoning their projects midway secure in the cynical knowledge that in the immediate run their personal properties cannot be touched by the mortgagees.

Banks in India, which had lent to such builders, invoke Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) that empower them to seize the mortgage assets, sell them through auction in which the participants are the defaulter’s competitors and recover their dues to that extent. This is what Union Bank of India sought to do in Rajasthan but thanks to the protection afforded to the buyers by the Real Estate Regulation Act (RERA), the Rajasthan RERA authority stopped Union Bank in its tracks.

Aggrieved, the Bank appealed to the Supreme Court which on February 22, 2022 dismissed the appeal and thereby upheld the following pro-buyer stance of RERA: the promoter shall after he executes an agreement for sale for any apartment, plot or building, as the case may be, not mortgage or create a charge on such apartment, plot or building, as the case may be, and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building, as the case may be.

In other words, the Supreme Court has relegated SARFAESI to the secondary position vis-à-vis RERA and said interests of homebuyers rank ahead of the financiers.

A moment’s reflection would show while the Apex Court has indeed clipped the wings of banks to this extent, it does not simultaneously and necessarily strengthen the hands of the homebuyers. For, this judgment in particular at best empowers the buyers to move the state RERA and block the auction of the unfinished project by the bank, period. But does this advance their cause? The answer is no. It is just a cold comfort for them. At best they have played the spoiler, scored a brownie point over the bank.

The only concrete step thus far taken by the government is to pitchfork its instrumentality National Building Construction Corporation (NBCC) to take over the abandoned projects of Amrapali Builders in NOIDA and thereby address the grievance of some 10,000 wannabe buyers. But can this be the template or panacea for addressing similar shenanigans of builders that leave the wannabe buyers in the lurch? The answer again is no.

The government must take the following steps to prevent and preempt this recurring spectacle of diversion of buyers’ and banks’ money by unscrupulous builders:

1. Emulate Tamil Nadu and Karnataka by mandating across the country the adoption of the concept of UDS (Undivided share) of immovable property. When multiple housing units are constructed on a piece of land, all the buyers get a proportionate share of the land. This must be recognized at the earliest. TN and Karnataka do so. As soon as a builder takes money from a buyer towards land, his UDS must be registered. In other words, what would remain thereafter is just the construction agreement. How can the builder be allowed to mortgage land that does not belong to him but collectively belongs to the buyers? In the absence of UDS, banks blithely lend to projects ignoring third party (buyer) rights that already exists but the one that is sadly not evidenced by a legal document.

2. Buyers should pay the installments of construction cost not to the wily builder but to the state RERA which should vet the invoices raised on the builders by various suppliers.

One good feature of Islamic banking is it doesn’t hand over money to the clients of banks. Instead, the bank identifies the machinery and its supplier in consultation with its client. Thereafter, it buys it on his behalf and hands it over to him in his capacity as a lessee. This halts and stifles any thoughts of diversion of funds the client might be harboring had he been entertained in his capacity as the borrower. This incidentally is also what ESCROW account mechanism is all about. This mechanism is quite widespread in the power industry.

Heavy-duty industrial customers do not pay the discom but pay into the ESCROW account of a bank which will release the funds first to service the loan obligations of the discom. The point is it is better to preempt all chances of diversion and the resultant default.

(The author is a veteran columnist and tweets @smurlidharan. Views are personal)

Published on: Tuesday, March 01, 2022, 11:14 AM IST