Page 45 - Banking Finance August 2021

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portfolio and more importantly to the fee based income. scampering for resolution in courts. This furthers the delay
With dwindling credit off take for some time now, banks are in delivery. The much touted RERA has had little success as
gunning for fee based income to spruce up their bottom it hasn't been rolled out pan India. Only few states like
lines. Maharashtra and UP that had embraced RERA in its truest
form can boast of the transparency and early resolution
Furthermore the narrative of privatizing public sector banks management under RERA Act.
and trimming work force would also mean that banks will
have to continually invent and innovate new credit products Even before the Covid crisis, buyers were wary of the 'falling
to sustain themselves, more so in the backdrop of less back on promises' attitude of the builders and thus the
government support in the foreseeable future. The customer number of cases filed have been plenty. There have been in
bases, the demographic pattern and the target markets for excess of 70 percent buyers who have filed cases against
banks shall witness new changes being ushered in. The scope errant builders.
for traditional and conventional banking will gradually shrink
and become redundant or passive. The banking space in Despite insertion of clauses in pre -sales contract of
India is set for an unprecedented galvanization and the compensating buyers in case of delay, has no real meaning
resultant impact of which is yet to be fathomed in its truest .The builders more often than not throw their weight around
sense. causing despair and disgust for the buyers. It is only after
the court intervention, that there is some respite for the
Charting the Unknown Waters- A aggrieved buyer but not before an agonizing wait. This has
become customary in almost all disputes related to delayed
humbling first! occupancy. In the following section an attempt is made to
In India, normally the process of purchasing a house involves propose a derivative product with some added dimensions
signing a pre- sales contract where the buyer and seller or amendments to finance housing loans.
agree on a price. In a sense the pre -sales contract can be
likened to a future contract, however the differences can Let's assume a residential apartment costs INR 85 lacs and
be stark. The major issues like cost escalation, delivery dates the share of margin on part of the buyer is INR 10 lacs.
and exit routes are noteworthy. Consequently the buyer and builder enter into a futures
contract (through the respective banks) of INR 75 lacs for a
In tumultuous times, where a buyer has to wait anxiously 3 bedroom apartment by paying margin of INR 10 lacs in
because of the delay by the builder, thereby simultaneously phases as and when demanded .Also assume there is a
paying both contractual payments and rent is a worrisome stipulation of a 6 months grace period from the scheduled
state to be in. Very often builders cite Force Majeure as a date of delivery. The futures is essentially to hedge against
reason for their delay, sending buyers scuttling and any cost escalation and performance risks as envisaged by
the buyer.

The contract can be further rolled over to the extent of the
grace period, with the costs of which is to be borne by the
builder ultimately. There is an inherent assumption that
builders with a certain amount of net worth can only opt
for such an arrangement as the final principal will be paid
on the agreed date. There will no major intermittent cash
flows apart from the margin payments which would form a
small portion of the total outlay. Smaller builders may not
find it feasible on the liquidity front.

Expanding the premise further, in the event of further delay

BANKING FINANCE | AUGUST | 2021 | 45