CIBIL to restore credit ratings & banks to stop EMIs: Delhi HC

Coming to the rescue of stuck home-buyers who had purchased flats under the subvention scheme, the Delhi High Court (HC) has extended the interim stay order in their favour by restraining banks and housing finance companies (HFCs) from taking coercive action against them for recovering EMIs (equated monthly instalments) for incomplete projects.

Further, in an order which will have far-reaching implications, the HC has also directed the lender banks and financial institutions of certain home-buyers, who have invested in projects by 'defaulter' developers, to provide appropriate information to Credit Information Bureau (India) Limited (CIBIL) to facilitate the suitable amendment of their ratings.

The Court clarified that its interim orders will bind the lender banks before it as well as the assignees of the debt.

What is a Subvention Scheme?

A subvention system is essentially a three-way agreement between the builder, the home-buyer, and the bank in which the buyer pays an upfront cost of 5%-20% as a down-payment and the bank pays the rest to the builder in the form of a loan. The builder pays the EMI till possession. 

Under the subvention scheme, the financial institution releases 80% of the loan amount to the developer even before construction starts. The home-buyer pays a certain amount (say, 15% of the cost of the apartment) as the down payment, while 80% of the cost was received by the builder from the bank, on behalf of the buyers in the beginning itself. Under the scheme, builders were expected to pay pre-EMIs to the bank and, in many cases, they did it till the pandemic when they stopped paying. There are also innumerable instances of builders making home-buyers to pay pre-EMIS, which the former are liable to do. These builders said they would adjust the amount against the remaining 5% which home-buyers were supposed to pay at the time of possession. However, eventually the buyers have ended up paying much more than the cost of the apartment and, ironically, they are still unsure of getting their homes. 

In many such cases, the home-buyers had booked under ‘no EMI until possession’ schemes. After paying a few pre-EMIs, the builder stopped paying them, saying he was facing a financial crunch and homebuyers were made to consent and pay on behalf of the builder.

While some buyers continue paying their EMIs for fear of their CIBIL score getting affected, some stopped paying and approached the Court

Earlier, the Delhi HC in its interim order, which came out on 31st January, had said homebuyers need not do that. The HC came to the rescue of these buyers and passed an interim stay order in their favour by restraining banks and housing finance companies (HFCs) from taking action against them for recovering EMIs for incomplete projects.

The buyers, through their lawyer had informed the HC that banks and financial institutions had disbursed loans to the builders even before construction had started. Banks continued to expect buyers to service the EMIs when it was the builders who had undertaken to pay the amount until possession. The HC observed that the petitioners “appear to have been left in the lurch and despite paying the advance amount and investing their hard-earned money to purchase their residential homes, the construction of the residential flats/apartments have not been completed till date.” 

More importantly the court added “The buyers who have invested their lifetime savings and their hard-earned income to purchase residential units, cannot be made to suffer the consequences of this apparent collusion between the banks/HFCs and the developers.”

The Court had also noted that 'grave and irreparable loss' will be caused to the petitioners if they are not granted any interim protection while adding that the matter “brings into light the well-known sorry state of affairs, which has been recently going on in the construction industry.”

“The balance of convenience, at this interim stage, lies in favour of the beleaguered homebuyers, keeping in view that they are being penalised despite not being at fault,” Justice Rekha Palli had noted. 

The Court said “prima facie, it appears that the loans were disbursed without any regard to the advisories of the Reserve Bank of India (RBI) and the National Housing Bank (NHB).” It said banks and HFCs disbursed the loan when the construction was incomplete and were now asking homebuyers to pay the amount initially required to be paid by the developers.

Buyers also prayed before the HC that their CIBIL score be restored and the pre-EMIs paid for by the buyers be refunded by the builder. They should also get back ECS default charges that have been levied.

Accordingly, Delhi HC has directed the banks to convey to CIBIL to restore the creditworthiness of home-buyers who stopped paying EMIs for incomplete projects.

The Delhi HC’s interim order restrains lenders from coercive action on borrowers under subvention scheme and directs them to provide appropriate information to CIBIL authorities on non-payment of EMIs by builders. With the Delhi HC extending its interim stay order on 28th March, which it had originally passed on 31st January this year in favour of such home-buyers, it is sure to come as a big relief to several thousand beleaguered home-buyers and borrowers. Besides, it has also directed the lending banks and HFCs to provide appropriate information regarding the petitioners (buyers) to the CIBIL authorities so that their ratings are suitably amended. With this, such home-buyers can take a sigh of relief. 

“Homebuyers have been suffering for a while now, the manner in which all these transactions have taken place between the builders and the banks are in clear contravention of the RBI guidelines. In many of the matters amount as much as 80% of the total consideration was disbursed by the banks when the project had not even started or received all the approvals from the authorities.

"Further in most of these matters builder had undertaken to pay the pre-EMIs till the possession and infact have paid them for a while, too. Today, the situation is such that majority of the money has been taken by the builder, banks paid it without any due-diligence, projects have not been delivered and the homebuyers are being made to bear the brunt of EMIs, rent and now legal expenses. In many cases such as Supertech, the builder has gone into insolvency,” explained Delhi-based lawyer Aditya Parolia who appeared on behalf of the petitioners while welcoming the order.

Following the order, home-buyers will not be liable to pay pre-EMIs. The Court has noted that, in all cases, the builder, banks and the buyers have entered into a tripartite agreement. The builder has promised to pay the pre-EMIs to banks till the possession of the booked units are handed over to the home-buyers.

The Court noted that merely because homebuyers entered into a tripartite agreement with banks/ HFCs and the developer, they cannot be held liable to repay the loan amount on account of default of the developers who have not only stopped paying pre-EMIs, but have also not, till date, handed over the flats to the home-buyers. 

Lawyers admit that the consumer courts, RERA and other allied forums have failed to address the issues of such distressed homebuyers. 

To be fair, in 2013, RBI had advised banks to exercise caution while financing interest subvention schemes “in view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues.” The banking regulator had also advised that disbursal of housing loans sanctioned to buyers should be linked to the stages of construction of the housing projects and that upfront disbursal should not be made in case of incomplete or under-construction or greenfield housing projects. Further in 2019, the NHB had also asked HFCs to 'desist' from offering loans under interest subvention schemes after complaints of default.

Dr. Ajay Kummar Pandey

( LLM, MBA, (UK), PhD, AIMA, AFAI, PHD Chamber, ICTC, PCI, FCC, DFC, PPL, MNP, BNI, ICJ (UK), WP, (UK), MLE, Harvard Square, London, CT, Blair Singer Institute, (USA), Dip. in International Crime, Leiden University, the Netherlands )

Advocate & Consultant, Supreme Court of India & High Courts

4C Supreme Law International, Delhi, NCR. Mumbai & Dubai

Tel: M- 91- 9818320572. Email: editor.kumar@gmail.com

Website: www.ajaykr.com, www.4Csupremelawint.com

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