To afford a home of one’s own is every person’s dream. But did you know that attachment proceedings can be initiated in respect of your dream home by the bank because your builder/developer has mortgaged the very property to the bank and has defaulted in repaying the loan?
In India, commercial banks are empowered to extend credit to builders / developers on commercial terms by way of loans linked to each specific project. According to the Reserve Bank of India (RBI), as on May 2009, an amount of Rs. 2.75 lakh crore was outstanding to be paid to banks by builders / developers. It is normal practice for builders / developers to mortgage their lands to raise finances for construction purposes.
At the time of purchasing or booking flats, not all buyers conduct proper due diligence on such projects as the builders / developers are not always keen to share the title documents. The prospective buyers end up relying on the assurances of the broker and brand value of the builder / developer and hence, are taken unawares when any adverse action is taken by the banks in respect of the mortgaged land.
In 2007, the U.S. was affected by the sub-prime crises that was triggered by dramatic rise in mortgage delinquencies and it exposed the weakness of the financial industry regulation. India though is not immune to such crisis, the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) 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 empowered the 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. Earlier the banks were unwilling to fund against the mortgage of properties as the same was considered as a dead asset, in case of a default. The enactment of SARFAESI Act 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 strongly weighed in the favor 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 / developers to declare if the land being developed by them is mortgaged with any bank. Pursuant to this PIL, the RBI on August 27, 2009 has issued directions to the banks, to stipulate as a part of the terms and conditions of the loans that the builders / developers are required to disclose in all pamphlets / brochures, etc. the names of the banks to which the land was mortgaged. Further, the builders / developers must also disclose such information while publishing any advertisement of the particular project. Going forward it is also mandatory for the builders / developers to indicate in their pamphlets / brochures, that they would provide the buyers with the No Objection Certificate (NOC) from the mortgagee bank before the sale of flats / property, if required.
These initiatives by the RBI are aimed towards protecting the rights of not just the buyers but also the mortgagee banks. Its time India got itself tougher disclosure norms to bring greater transparency in the system to facilitate informed decision by the buyers who invest their entire life savings in their dream home.
Mrinal Kumar is a Principal Associate and Shruti Garg is an Associate with Amarchand & Mangaldas & Suresh A. Shroff. & Co. Views expressed here are personal.
