Good news! Homebuyers now turn 'financial creditors' at par with banks; builders suffer setback
Before this, homebuyers were the last in priority and chances of them getting their money back were virtually nil.
A Cabinet meet chaired by Prime Minister Narendra Modi on Wednesday brought good news for homebuyers who have suffered in the hands of defaulting builders who refuse to refund their money. The Jaypee Infratech situation caused major problems for the home buyers and banks concerned, as the company turned defaulter. It could not finish the housing projects and neither could it pay back the banks nor the homebuyers. The government has now decided to put end to this situation, and in a major move has decided to term these homebuyers as 'financial creditors' under the Insolvency & Bankruptcy Code (IBC). This grants homebuyers equal priority like banks and other institutional creditors. This means when the time comes for refunds, homebuyers will not be the last in line. They will now be equal to others when money is paid back. Before this, homebuyers were the last in priority and chances of them getting their money back were virtually nil. India Rating agency believes this move can boost customer sentiment.
Ind-Ra highlighted that 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 added, “This will strengthen home buyers’ right and power in case of bankruptcy of the developer and any default in payment or planned schedule.”
While this move will be good for home buyers, it turns out this could be credit negative for lenders like banks and financial institutions.
According to Ind-Ra, the lenders will suffer as 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.
Ind-Ra believes that with the dilution of lenders’ right in liquidation proceeds, financiers have to start repricing lending yields. As a result, borrowing rates could harden for developers relative to their credit profiles.
However, Ind-Ra believes 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.
Ind-Ra believes developers would absorb the likely incremental costs, with limited market readiness to absorb price rise as well as existing inventory dynamics in most markets. This would also affect private equity financing, given their structure of funding.