As Cabinet on Wednesday cleared amendments to the Insolvency and Bankruptcy Code (IBC), incorporating changes suggested by a government appointed panel, it's a victory for home buyers facing hardships due to incomplete real estate projects.
A 14-member Insolvency Law Committee had suggested that home buyers should be treated as financial creditors, which will allow them to equitably participate in an insolvency resolution process.
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Anuj Puri, Chairman, ANAROCK Property Consultants, said, “The proposed revision of IBC code comes as a massive relief to home buyers. Residential property buyers are now effectively considered at par with banks and other institutional creditors when it comes to recovering dues from real estate developers who have gone bankrupt.”
But the proposed revision of IBC by the government could be credit negative for the lenders of developers, since the recovery proceeds will now have another layer of distribution, which was not factored in at the time of origination of loan to the developer.
This would effectively increase the realised haircuts for the financers. In other words, without changes in probability of default, loss given default (LGD) could increase for the financiers.
According to India Ratings and Research, borrowing rates could harden for developers relative to their credit profiles.
However, the increased borrowing cost may not materially increase the end-value of real estate, since institutional lending forms 20%-30% of the total value, with the balance coming from buyers’ construction-linked receipts.
As for home buyers, they will form a part of the committee of creditors that approves a resolution plan and their voting rights will be in line with their advances.
However, the final contours of the code needs to be seen for smooth functioning of the committee, considering several home buyers and voting rights.
“It needs to be seen how the resolution mechanism for claiming the dues actually falls in place for the concerned home buyers. Home buyers need to know how exactly they will be represented in the creditors’ committee – in other words, whether the National Company Law Tribunal will appoint a resolution professional to represent their rights and interests,” said Anuj Puri.
The proposed revision of IBC will also benefit housing financing companies’ asset quality and could get some comfort as buyers’ (home loan taker) rights over a defaulting builder and cash flows on liquidation will enhance.
Anuj Puri said the IBC amendment will certainly go a considerable way in bringing more transparency into the overall funding of projects across the country.
He said builders will become more cautious while taking funds from financial institutions and banks, as they would now also be accountable to home buyers as well as the financial institutions if their business goes belly-up.
Regarding recovery of delinquent assets, majority delinquent real estate assets right now are either restructured or taken over by new sponsors and subsequently refinanced.Therefore, it is only in cases, where the developer is under extreme financial duress that financial institutions are likely to proceed under the IBC.