Will banks ceding first right over stuck realty projects to new lenders speed up completion?

Lenders currently do not have the ability to cede charge — under RBI rules they are expected to keep the assets current and standard. In the event of an asset becoming an NPA, there are prescribed norms on what needs to be done. Representative picture

In a move that could bring relief to thousands of homebuyers stuck with unfinished projects for years, several banks have expressed a willingness to cede their rights over stuck real estate projects in favour of new lenders willing to offer priority funding to speed up completion, people aware of the matter told Moneycontrol. The original lenders have classified these projects as non-performing assets.

The issue of whether the stuck assets fund set up by the government requires more funds was also discussed at recent meetings between commercial banks and the Reserve Bank of India.

Experts told Moneycontrol that the RBI needs to put in place a  handover framework. Only if banks and lenders have clarity on whom to hand over charge to, and arrive at a one-time settlement (OTS) and the price at which the loan should be settled, will new lenders come forward to extend credit to stuck projects.

Queries have been sent to the RBI.

The government is keen to find a solution to almost five lakh real estate projects that are stuck across the country. The committee on stalled real estate projects, chaired by former NITI Aayog Chief Executive Officer (CEO) Amitabh Kant, has over the last few weeks met representatives of apartment owners’ associations, bankers and builders after its formation by the housing ministry on March 31. The panel is expected to submit its report soon.

In November 2019, the Union government launched the SWAMIH Investment Fund to help complete over 1,500 stalled housing projects, including those that have been declared non-performing assets (NPAs) or admitted into insolvency proceedings.

The government had put an additional Rs 5,000 crore into the SWAMIH Invest Fund-I to help the stressed realty investment platform achieve its final close at Rs 15,530 crore in December 2022. The fund intends to provide priority debt financing for the completion of stressed, brownfield and residential projects registered with regulatory bodies that are in the affordable, mid-income housing category.

Amit Goenka, MD and CEO of Nisus Finance Services Co Pvt Ltd, told Moneycontrol that while several stuck projects have been completed through SBICap funding, challenges still persist. Several projects that are stuck have not been able to arrive at a resolution as lenders are not forthcoming to take a haircut or infuse additional funds. Many banks have also been hesitant to surrender their first right over cashflows.

Lenders currently do not have the ability to cede charge — under RBI rules they are expected to keep the assets current and standard. In the event of an asset becoming an NPA, there are prescribed norms on what needs to be done. A lender has the option to either invoke the  SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act), it can sell the asset to an asset reconstruction company and exit or can initiate insolvency proceedings. However, there is no predetermined structure available on whether a lender can hand over charge and help complete the stuck project and get residual value, he explained.

The recent meetings have deliberated on this issue. “If a framework on ceding charge is put in place, banks and lenders would have more clarity on whom to cede charge to and also arrive at an one-time settlement (OTS) or the price at which the loan needs to be settled,” he said.

He added that lenders are better placed to relinquish charge in an upcycle, when real estate markets are doing well, as there is a  greater possibility of the first lender recovering the money rather than in a low market, when they may not see any residual value in their favour, he said.

If there is no framework in place on how to give up the first charge, lenders may not come forward to extend credit to stuck projects, he added.

Creating a charge means establishing the lenders’ right over assets of the borrower in order to recover the principal and interest in the event of default on the borrower’s part. A charge can be created on the same asset by more than one lender. The lender in whose favour the first charge gets created is known as the first charge. If a subsequent charge gets created in favour of a different lender on the same asset, that charge holder is known as the second charge. When the first charge holder disposes off the asset in its favour to recover dues from the borrower, the second charge holder is entitled to receive the residual value of the assets, if any, that accrue to the first charge holder. This may be possible only if the first charge holder’s dues are fully liquidated.

“This will encourage banks to lend to stuck projects. Also, there are a lot of PE players and special situation funds that would be interested in funding stuck projects as long as they get equal treatment as the SWAMIH fund,” said Prashant Thakur, senior director and head, Research, ANAROCK Group.

A meeting of the Noida and Greater Noida authorities and representatives of banks and real estate developers was also held recently in Noida to thrash out the issues that plague the two markets. It also looked at ways to resolve the deadlock between real estate companies and the development authorities of Noida and Greater Noida over legacy land dues of nearly Rs 39,000 crore, and discussed an action plan for stuck housing units in the region.

In an earlier interview with Moneycontrol, Irfan A Kazi, chief investment officer, SWAMIH Investment Fund, said that most banks and NBFCs (the existing lenders) have been reluctant to give up on the first charge.

Queries have been sent to SBICap.