On June 8 the Reserve Bank of India (RBI) enhanced limits on individual housing loans extended by cooperative banks in order to meet the rise in housing prices. Accordingly, the cooperative banks can sanction loans up to ₹75 lakh per individual borrower subject to certain conditions. Essentially, cooperative banks provide finance to Commercial Real Estate — Residential Housing within existing aggregate housing finance limit of 5 per cent of their total assets. Though the government and the RBI would like to meet the growing need of affordable housing (‘Housing for all’), there is a lot of scope for improvement in regulation of real estate sector.

The background

With a view to protecting interest of home-buyers, and boosting investments in the industry, the government enacted the Real Estate (Regulation and Development) Act in 2016, popularly known as RERA. According to this Act, registration of majority of real estate projects is compulsory before their launch.

Further, on-going projects need to be registered within three months to maintain greater transparency in execution and marketing of these projects. Though RERA has been there on paper, its implementation in letter and spirit is yet to happen.

In fact, the real estate sector is dominated by land sharks who have an unholy nexus among builders, politicians and line department officials.

Typical issues in the Indian real estate sector include undue delay in handing over the flats/houses to the customers, levy of hidden charges/interest, mis-match between the amenities promised in the brochure and actual delivery, un-authorised sale of common areas such as parking slots, conversion of open place into commercial space, construction of super-built up area beyond approval, construction of buildings on disputed lands with the connivance of the officials, collection of funds from the buyers disproportionate to physical progress of work, and diversion of funds to other projects constructed by the builders.

More often than not, builders ‘over promise and under deliver’ since the customers hardly have any collective bargaining power till formation of association of home owners. Recently, it was reported that DHFL allegedly diverted funds of ₹14,683 crore through nine real estate firms controlled by its promoters, where they had financial interests.

The customers, who are not savvy — in terms of legal, financial and other matters — sign the bulky one-sided sale agreements (crafted by legal counsels of builders) in good faith, without reading the fineprint. As a result, they will be on the losing side when it comes to delivery of goods and services by the builder.

Hence, it is hardly surprising to see the numerous court judgments pronounced in favour of hapless and helpless home buyers in the recent times.

A few landmark cases

The Supreme Court gave a historic judgment in January 2021 in respect of Ireo Grace Realtech Pvt Ltd vs Abhishek Khanna & Others that incorporation of one-sided and unreasonable clauses in Buyer’s Agreement by the builder is tantamount to an unfair trade practice under the Consumer Protection Act, 1986.

In another case, the Supreme Court ordered Jaypee Associates in September 2017 to pay ₹5 lakh each to 10 home buyers who had not been handed over flats on schedule. On May 8, 2019, the Supreme Court pronounced a landmark judgment to demolish five apartment blocks in Maradu municipality in Kerala, for blatant violation of Coastal Regulation Zone rules.

Further ,in a 2010 judgment in Nahalchand Laloochand Pvt Ltd vs Panchali Co-operative Housing Society Ltd, the Supreme Court ruled that builders can’t sell parking areas as independent units as these areas are to be treated as “common areas and facilities” for the owners.

Also, the Court directed that the developer is only entitled to charge price for common areas and facilities from purchaser of each flat in proportion to carpet area of the flat.

In view of the aforementioned issues, the real estate sector needs the following regulatory measures to contain malpractices of unscrupulous builders:

(i) Post-completion audit of projects should be conducted and approval of future projects be withheld in case of any major deviations, besides making developer responsible for all structural defects for five years from the date of occupancy certificate;

(ii) Income tax exemption on interest paid by the buyers may be considered, wherein more than 75 per cent amount of home value has been paid before handing over to the buyer;

(iii) The builder must compensate the Residents Welfare Association for not providing promised amenities as per the brochure;

(iv) The brochure of each project should contain all information, inter alia, on its rating and it should form part of its detailed project report;

(v) Builders should be regulated to handover the entire building premises to Resident Owners’ Association, within a maximum period of one year from the date of occupancy to the extent of two third of dwelling units. Further, the builders should submit audited financial accounts of the project, especially advance maintenance costs received from the buyers, at the time of handing over the project to avoid embezzlement of funds;

(vi) The RBI should direct banks to conduct proper due diligence, including statutory, legal and environmental clearances, besides matching physical and financial progress of the buildings while releasing disbursements to the borrowers. Further, cooperative banks should be imparted intensive training in credit risk management of housing loans to mitigate systemic risk; and

(vii) Realtors should be incentivised to maintain escrow account for each project and penalised for diversion of funds.

In sum, customers should understand that a lower price of flat/villa does not necessarily mean a great deal. Caveat Emptor — ‘buyer beware’ — clause should be followed religiously by the customers before purchase in order to receive value for their hard-earned money. When the builders sell a dream home to buyers, builders must be held accountable for realisation of that dream.

Srikanth is Associate Professor, Registrar, and Director (Finance), DDU-GKY, NIRDPR, Hyderabad, and Syamala Rao is Research Officer, NIRDPR, Hyderabad