Effects of COVID-19 on Home Buyers and Real Estate Developers: Lawyers Advice for Real Estate Legal Issues in Delhi NCR | Real Estate Attorney in India | Real Estate Attorney in Delhi NCR | NRI Legal Services in Delhi NCR |
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The real estate sector has been coping with a decelerating economy, credit crunch and growing inventories for quite some time, and the COVID-19 pandemic has only made matters worse. The nationwide lockdown, that came as a result, has stopped most activities relating to construction and has seen labourers planning to or having already gone back to their villages. This would obviously lead to a shortage in labour for quite some time and can further delay the recovery progress for such a sector.
The reduction in demand in the residential sector has already cut project launches, housing sales and price growth in the realty sector of India, which has been winding under the burden caused by the huge supervisory changes caused by the 2018 Real Estate Regulatory Authority (RERA), demonetisation and the Goods and Services Tax (GST).
Regulatory Steps Undertaken: –
The Central Bank has allowed a moratorium on term loans, relieved working capital financing and delayed interest payment on working capital facilities without an asset classification demotion. In terms of ad-hoc respite, a lot of public sector banks have announced emergency credit lines through which a maximum loan amount of up to Rs 200 crore or 10 percent of the current fund-based working capital parameters can be utilised by home loan borrowers.
The Central Government recently declared lower interest rates and higher tax breaks on home loans to make acquisitions more rewarding, while also the creation of a Rs 25,000-crore fund for stress surrounding stuck projects.
That being said, the government’s recent decision to guide state governments and Union territories to prolong the registration and completion dates by six months, of all registered projects expiring on or after March 25, 2020 without individual applications. This may relieve the pressure on certain developers to some extent.
The Reserve Bank of India’s choice to cut the repo rate by 40 basis points to 4% will give developers some much needed breathing space.
RBI Guidelines of Loan Rescheduling
The Reserve Bank of India, vide Circular No. RBI/2019-20/186 dated 27.03.2020, broadcasted a regulatory relief package for the lending institutions and the borrowers. Home buyers with active loans or looking for home loans, as well as all other borrowers, can get the benefit of the package announced by the Reserved Bank of India.
Relief in relation to Tax Laws
The Finance Ministry has announced a number of steps relating to regulatory and statutory compliances in view of giving relief during the COVID-19 outbreak.
The Centre has introduced the Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 on 31st March, 2020 which offers extra time for various time restrictions under the Taxation laws as well as the Central Excise Act, 1944, Income Tax Act, 1961, the Customs Act, 1962 etc. Additionally, a number of circulars and notifications were issued for the relaxation in compliances under the GST law.
The RBI injected liquidity of Rs 3.74 lakh crore, which along with the moratorium, applying to all loans by financial institutions will ease liquidity concerns in short run and help developers, as well as home buyers. It is a big reprieve for developers and buyers to help them alleviate the challenges faced by them.
Regulations regarding Secured Lending in India: –
Secured lending is regulated in India. A number of institutions are authorized to participate in lending activities. These include:
• scheduled and non-scheduled commercial banks;
• non-banking finance companies (NBFCs);
• cooperative society banks;
• small finance banks;
• microfinance institutions; and
• money lenders.
These regulations involve lending agencies to uphold principles relating to capital competence, cash reserve ratio, sensible norms, credit ceiling, statutory liquidity ratio and know-your-customer guidelines – even if each of these standards would apply to each class of lending agency in a diverse manner. Each agency plays a unique role in terms of the kind of lending and borrowing.
Specific Legal Issues for a Prospective Borrower to Consider: –
A company instituted in India may borrow funds in agreement with the Companies Act 2013. A public limited company in India would need the endorsement of 75% of its shareholders if the projected borrowing, along with the amount already borrowed by the company, would surpass the cumulative of its paid-up share capital and free reserves. This would exclude momentary loans which can be repaid either on demand or within six months of the date of payment, such as interim, cash credit measures or bill discounting services obtained in the natural course of business. Relevant corporate permissions must be given along with legal filings.
It must be understood however, that with the coming of COVID-19, the willingness of parent or holding companies or even personal sponsors, to act as guarantors for a potential borrower, or in this case, a home buyer, reduces significantly considering the repression like condition of the Indian economy. With the number of avenues available to generate income declining at a rapid rate, it will not be surprising to see home buyers and other potential borrowers thinking twice about entering loan activities if they do not have a guarantor or any other form of security to fall back on.
Effects in the Long-Run
The government has also said that there could be an extension of six months given to developers through the RERA citing the force majeure clause, aiming to handle delays in project completion and backing the builder community.
As it is, we can expect postponing of purchase decisions considering site-visits by are becoming out of question for prospective property seekers for quite some time. The slowdown is easily visible since the lockdown began in late March and decisions regarding housing will take a major hit with site-visits deemed unfeasible.
Even after the RBI announced several rate cuts, any positive effect on the sentiment of home buyers can only be seen in the medium or long term. The step, nevertheless, would come as a boost for existing buyers, who might be finding it difficult to pay EMIs in the short-term because of the lockdown and in medium term due to job loss.
Home Buyer’s Perspective
On the opposite side of the spectrum, if your income earning channels have not been affected by the current crisis and you have already taken ownership of your property, this may actually be a boon for you since home loan interest rates are likely to plummet to record lows given the RBI’s repo rate cut declaration. It is expected that EMIs reduce quickly if you have a loan linked to repo rate while those with loans which are MCLR-based will have to wait longer until lenders reset the loan rate.
Moreover, the RBI has also asked for an extension of the loan moratorium facility by another 3 months so that borrowers are allowed to manage their finances better considering these unexpected circumstances.
Important points for home buyers’ consideration: –
• If the population is planning on buying a home, it is advised that a ready-to-move-in property is preferred over an under-construction one at this point considering those who haven’t yet received possession of their property have to wait longer due to construction delays. Furthermore, better offers can be expected for those who wait as the recent changes can lower the property rates in the coming future, as per the opinion of various experts.
• If you’ve just acquired a property or are thinking of doing so after the lockdown, you’ll be wise not to postpone the purchase of a home loan insurance policy or term insurance policy of a suitable cover size for proper and wholesome safety. Always refer to your real estate and monetary advisor if you need professional help to draw out your approaches.
• If you are prepared to take on some hurdles like late completion or various other markets-related risks, you can contemplate investing in an under-construction property.
• In the event that you decide to so, check things like the credentials of the builder, financial capability, track record, registration of the property by RERA and tie-ups with any bank before signing any agreement.
The COVID-19 pandemic has definitely dampened the dreams of prospective home buyers who will be grappling with the difficulty of maintaining a stable income above all else. However, with the RBI batting on the side of home buyers, allowing for a rescheduling of loans as well as trying to get the moratorium extended and allowing for more time to file taxes under various Taxation Laws, it is not exactly a bad time for prospective home buyers to look for home loans, provided proper precautionary measures are taken.
Authored By: Adv. Anant Sharma & Parinay Gupta