Subvention issue in SC: Lenders might have to go easy on recovering from home buyers

In a post-RERA world, the subvention schemes are less risky on one level as they are registered with RERA and need to maintain escrow accounts and submit quarterly project updates.

The spotlight is back on banks persecuting buyers for repayments in subvention schemes where developers were to pay equated monthly instalments (EMIs) till possession. The Delhi High Court order of March 14, 2023, dismissed petitions by multiple home buyers who were asking for a direction to banks and financial institutions to not charge EMIs till possession of flats. This dismissal was challenged in the Supreme Court by 11 advocates on behalf of over 600 buyers.  On April 17, 2023, the quorum of Justice V Ramasubramanian and Justice Pankaj Mithal issued an extension of the interim protection benefits that had been granted from January 31, 2022. This is till the next date of hearing.

The logic of Justice Purushaindra Kumar Kaurav for refusing the petitions in the March 14, 2023 order was that there were many alternative remedies available under the Consumer Protection Act, Insolvency and Bankruptcy Code (IBC) and the Real Estate Regulation and Development Act (RERA). The fact is that none of these agencies has been able to help resolve the issue with lenders. This explains why so many consumers went back to the High Court for relief. In fact, says Advocate Aditya Purulia, who led the challenge to the order in the SC, none of these forums can rule upon lenders.

Win-win Solution

A subvention scheme was a dream offer by developers to rope in those buyers who did not have ready cash to buy their house. Nor could they afford to pay the rent for their present house as well as the EMI for the new house. In this case, developers gave buyers the option of paying just 10, 20 or 30 per cent of the cost of the house in the beginning. The rest of the money was secured from a financial institution as a loan in the name of the buyer on a tripartite order between the buyer, developer and lender. This money was released by the bank to the developer who undertook to pay the EMIs till possession.

In theory, this was a fantastic scheme and a win-win situation for all parties. The consumer’s problem of funds was addressed, the bank got to disburse the amount and keep the home loan portfolios going and the developer got funds to complete the projects at retail rather than commercial rates. At the base of all this was a trust that all parties would adhere to their part of the bargain. Also, many individual buyers opted for bank loans on the premise that banks with their due diligence capability would be able to check that the developers were indeed capable of paying the promised EMIs and building the real estate.

No Due Diligence

So, what went wrong? Pretty much everything. Banks kept releasing instalments to developers even when there was no progress in structure on the ground. The so-called due diligence process never kicked off as banks raced to complete their stiff lending targets. In many cases, the projects were sold at prices that could never sustain completion. Noida, Greater Noida and Ghaziabad were prime examples of projects sold at extremely low and unviable prices. Again, with little or no due diligence, banks lent to the projects as well as to retail consumers.

Why did the entire subvention scheme fall apart? In large measure, it was because of greed. Lender desperation to disburse was at the heart of it. But developer greed took many forms. Many developers were more interested in using these funds to shore up land banks for future developments. Before RERA was launched in 2016 and made a functional entity in 2017, there was no downside to not delivering the projects. Money could be moved across projects. So, consumers who opted for subvention schemes on the promise of payment of EMI till possession by the builder were left high and dry when possession times came and went with hardly any progress on the ground. Advocates like Purulia could not get at them then as the funding was under the radar. The Reserve Bank of India did issue cautions against the scheme from time to time.

Under The Radar Lending

The issue here is really one of what happens when promises are made and not kept. Especially when there is nothing strictly legal about it. Consumers want the units to be delivered before they start payments. Banks want the money back whether the project is completed or not. Many developers have siphoned out the money and not left anything to pay the promised EMIs. And the High Court, in tossing out the plea and sending consumers back to the different forums did not show empathy for their plight. The solutions are difficult to find. But it is essential that they are found, if there has to be faith in the rule of law. The Supreme Court, by allowing the rejection to be challenged by groups of buyers has proved that all is not lost yet. But it is not a class action yet. Only those who challenge the case in court can get relief from the verdict.

In a post-RERA world, the subvention schemes are less risky on one level as they are registered with RERA and need to maintain escrow accounts and submit quarterly project updates. But there is no one forum that has jurisdiction over these tripartite agreements. RERA authorities are not uniformly effective. And the states where they are less effective see consumers running from pillar to post to get the relevant orders that RERAs may well provide.

And the biggest message here is that lenders cannot be above the law. It is important to protect banks from failing, but not at the cost of individual consumers who are the backbone of the real estate supply chain. The Supreme Court has ignited a hope in them again. Can the promises to them now be kept?

E Jayashree Kurup is a writer/researcher in Construction and Director, Real Estate & Cities, Wordmeister Editorial Services. Views are personal and do not represent the stand of this publication.