Homebuyers, banks on the same side

The Supreme Court's verdict placing the interests of homebuyers above that of banks when a company defaults in repaying banks loans and handing over possession is welcome. It upholds the ruling of the Rajasthan High Court to make banks accountable under the Real Estate (Regulation and Development) Act (Rera), if proceedings against them are initiated by homeowners. The law allows a buyer to claim refund of the amount paid along with interest compensation from a developer who defaults and delays the possession of property. And if the buyer wants the home and not a refund, the promoter has to pay interest for every month of delay, till the buyer gets possession. The court has rightly held that if there is a conflict between Rera and recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, the former will prevail.

Banks lend to real estate developers. When a bank sanctions a loan to a developer for, say, a residential project, the project is mortgaged to it. The developer advertises the project and collects money from buyers who, in turn, take loans from banks against the mortgage of their flats. Whenever the developer sells portions of the project, he is supposed to deposit the proceeds from the sale with the lending bank, which releases the charge over the property sold to the homebuyer. But the system does not seem to operate that way. Project financing must ensure homebuyers are free of any encumbrances created for the construction of their flat.

The court held that complaints against banks can be filed before Rera if the lending bank has taken possession of the project as a secured creditor, pursuant to the default by the promoter. Rightly, the bankruptcy code treats homebuyers as financial creditors. Rera and Sarfaesi must be interpreted consistently to protect the interest of homeowners and ensure banks recover their dues from defaulting promoters. Bankers to the builder and homebuyers must be on the same side rather than 'either-or'.