Home loan buyers can now recover part of their dues from Kolkata builder in case of default. This right given to him by the government will increase the problems of builders’ lenders. India Ratings and Research says that due to this, lenders will have to be satisfied with more haircut in the coming times.
The Cabinet has cleared the ordinance granting Home Buyers the status of Financial Creditors instead of Operational Creditors under the Insolvency and Bankruptcy Code 2016. This means that when the defaulting builder is liquidated, in that process home buyers will be treated as equal to the financial lenders. The rating agency said in its report, “This could have a negative impact on the lenders as there will now be another share of the money received in the recovery.” Till now, the lenders did not consider this factor while distributing the loan to the developer.
Earlier home buyers were considered operational creditors and their interests were not fully protected. But now they will be able to recover some part of the outstanding amount if the builder defaults. According to the rules so far, payments to buyers were made according to the remaining amount after paying the dues of the financial creditors. India Ratings says that due to the reduction in the share of lenders from the liquidation, they will now have to re-price their lending yield. This will increase the lending rate of the developers according to their credit profile.
If the home buyers are treated as secured in case of claim then the lender’s haircut will increase. But the re-pricing of lending yields does not necessarily increase real estate prices as the builders collect only 20-30% of the requirement from institutional lending. The rest comes from construction linked receipts from home buyers. The rating agency believes that the developers will bear their own burden on the increase in cost as the market is currently experiencing very low capacity to withstand price hikes. There is already a lot of inventory in the market as well.
