There is something about homebuyers in Delhi-NCR, their woes never seem to end. Recently, Supertech was declared insolvent by the National Company Law Tribunal (NCLT), a move likely to affect 25,000 homebuyers as the Delhi-based real estate player has several ongoing projects in Noida, Gurugram and Ghaziabad.
Even lenders are worried about what awaits them at the end of Supertech insolvency case. Most likely a deep haircut. Supertech is said to have an exposure of Rs 150 crore to Union Bank of India and an aggregate debt exposure of Rs 1,200 crore to its creditors.
Both banks and homebuyers have a long legal battle ahead at the bankruptcy court. Lenders include Union Bank of India, L&T Finance and Indiabulls Housing Finance.
This is the second big jolt to Supertech in the recent past. In August 2021, the Supreme Court had ordered the demolition of Supertech twin 40-storeyed towers in Noida, citing violation of rules.
What’s going on?
How do real estate players land themselves in a financial mess? How does the lender-developer transaction work?
Typically, banks release payments to the builder looking at the land bank and operational record. This is the first phase of the lender exposure to the project.
Banks draw comfort from the fact that there is an underlying asset (land). The remaining funds are released later as the project progresses.
Builder, who would have already taken an advance amount from the homebuyers, raises demand for additional money linked to the completion of each phase.
About 90 percent of the loan amount is drawn by the time the structure is ready. The remaining 10 percent is for the final touches, including electrical, flooring and furnishing works.
The problem crops up when the construction work doesn’t go to plan. How does this happen?
Too many diversions
In most cases, financial stress is linked to the diversion of fund from the stated purpose. The builder diverts the money raised from the banks and customers for activities such as the purchase of additional land or completion of an old project, leaving homebuyers high and dry.
In some other cases, external factors—a lull in demand—or local issues, too, play a role.
What happened with Supertech?
There is no clarity yet on what caused the financial stress. Several of its housing projects in Noida and Greater Noida got stuck due to financial stress. It had sought assistance from the government’s stressed asset fund to complete projects but lenders had already tagged the loan as bad and weren’t willing to put good money after bad.
If a bank gives additional funds to a company whose loan is already an NPA, fresh lending also becomes NPA from the start. For this reason, lenders aren’t willing to lend additional money to a company, which is already a “bad account”. This worsens the problem.
The road ahead will be long and bumpy. Supertech has already said it will challenge the NCLT case in the National Company Law Appellate Tribunal, which means the resolution process will begin only after the NCLAT verdict.
While lenders are sure to take a hit, they have already factored in the loss and made provisions. The real pain will be for the homebuyers who will get caught in the crossfire.
What can they do? They don’t have too many options to recover their money but experts suggest that homebuyers should file their claims with the resolution professional at the earliest and become a party to the insolvency case.
Homebuyers can also join hands with the committee of creditors, which will have a say in the resolution process. Whatever the outcome, a quick resolution looks unlikely.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)