To afford a home of your own is every person’s dream. But did you know that attachment proceedings can be initiated by the bank, in respect of your dream home, because your builder or developer has mortgaged the property to the bank and has defaulted in repaying the loan?
procedures in india
In India, commercial banks are empowered to extend credit to builders and developers on commercial terms by way of loans linked to each specific project. It is normal practice for builders and developers to mortgage their lands to raise finances for construction purposes. According to the Reserve Bank of India (RBI), as of May 2009, an outstanding amount of Rs2,750bn was to be paid to banks by builders and developers.
At the time of purchasing or booking flats, not all buyers conduct proper due diligence on such projects, as the builders and developers are not always keen to share the title documents. The prospective buyers must then rely on the assurances of the broker and the brand value of the builder or developer, and, hence, are taken unawares when any adverse action is taken by the banks in respect of the mortgaged land.
In 2007 the US was affected by the sub-prime crisis that was triggered by a dramatic rise in mortgage delinquencies. The crisis exposed the weakness of the regulatory system in the financial services industry. India on the other hand, though not immune to such crisis, has weathered the storm better. The enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act 2002 has enabled the banks to improve recovery by equipping them with wide powers to enforce their security interest, without the intervention of a court or tribunal, thereby managing liquidity problems. The SARFAESI Act 2002 empowered banks to take over the possession of the secured asset along with the right to transfer, by way of lease, assignment or sale, the asset in the event of a default by the borrower in making the payments to the banks. This, contrasted with the earlier practice where banks were unwilling to fund against the mortgage of properties as it was considered a dead asset in case of a default, has resulted in a sudden spurt in the lending sector.
In light of the strong position of the banks and the need for consumer protection, public opinion weighed strongly in favour of creating consumer awareness to help the customers make an informed decision before investing in any property.
A public interest litigation (PIL) was filed before the High Court of Bombay, where the petitioner urged the court to direct all banks to make it mandatory for builders and developers to declare if the land being developed by them is mortgaged with any bank. On 27 August 2009, pursuant to this PIL, the RBI issued directions to the banks stipulating that, as a part of the terms and conditions of the loans, the builders and developers are required to disclose (in all pamphlets and brochures) the names of the banks to which the land was mortgaged. Further, the builders and developers must also disclose such information while publishing any advertisement of the particular project.
Going forward it is also mandatory for the builders and developers to indicate (in their pamphlets and brochures) that they would provide the buyers with the no objection certificate (NOC) from the mortgagee bank before the sale of flats or property, if required.
These initiatives by the RBI are aimed at protecting the rights of not just the buyers but also the mortgagee banks. It is time India got itself tougher disclosure norms to bring greater transparency in the system. This would facilitate an informed decision by the buyers who invest their life savings in their dream home.
By Mrinal Kumar, principal associate, and Shruti Garg, associate, Amarchand Mangaldas.