Let banks bail them out

The court’s emphasis on getting houses built for their handover to buyers is entirely welcome. However, the idea of resolving insolvency project by project, rather than of the corporate entity as a whole under the Insolvency and Bankruptcy Code (IBC), might prove unhelpful.

To stop developers using money taken from one set of homebuyers for expenditure on another project, the Real Estate Regulation Act had mandated separate accounts for each. But fund diversion seems to persist.

There are instances of one project’s construction being left in the lurch, resulting in buyer distress, while others of the same company carry on. This arises from either bad planning or fund jugglery. Project-wise resolution could privilege the claims of one set of owners over others, depending on differing stages of completion and how the law is applied.

Judicial processes should be fair to all jilted home buyers. And if a builder is in no position to meet its obligations, it should be taken over swiftly, with its assets put on the block as a last resort.

One way or another, the space for solutions must expand. To relieve disappointed homebuyers of their misery, let the principal financial creditors—i.e., the banks that have lent to the defaulting developer and its homebuyers—jointly float a special purpose vehicle (SPV) that buys out the homebuyers’ entire investment in units under construction.

Plus, give these homebuyers the right of first refusal over these homes once they’re ready. If the creditors that own the SPV get control of the builder (or project), they could either make the SPV finish the job on its own or sell this vehicle to an asset reconstruction company (ARC) that may then try to get the homes built. If the ARC gets access to finance from a special window of the Centre for affordable and middle-income housing, perhaps cost overruns could be covered and home delivery enabled. The promises made to homeowners would get transferred along with the SPV.

How fair would it be to ask banks to buy out the interests of homebuyers at full face value? Quite fair. The banks that lent the latter money would see their loan quality improve and also get hold of saleable collateral. Lenders that bankrolled the developer would also need the homes built for capital recovery.

Sure, banks could lose the time value of money locked up in such projects. Yet, they are well placed to analyse the viability of projects and the creditworthiness of developers. If they err, they should expect to pay a price for it.

A more radical but more effective solution to this entire mess would be to bar the sale of residential units until they are ready for possession. Homebuyers would not have to bear the double burden of rent and the repayment of loans taken to buy unbuilt homes. This would end the risk of buying a home from a developer that might prove better at developing problems than homes.

True, it would force builders to take on the entire burden of debt for housing projects. But it would also sharpen the risk evaluation skills of banks and push developers to access funds from India’s bond market or real estate investment trusts. Whatever we do, ordinary folks should be spared heavy risks.