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By Dr. Sanjay Chaturvedi, Editor

Housing Finance borrowers have started refusing to pay EMI on home loan taken in China. Reason is a major default by the builders and developers to complete the projects and completion nowhere. Besides this, a huge recessionary trend in the national economy is seen after COVID period which is still running.

In China, real estate prices will see a nose dive in August 2022.  Month-on-month price falls spread to more cities in August 2022, with unfinished projects across China increasingly a longer-term drag on sentiment. Out of the 70 cities surveyed, 50 reported price falls in August, up from 40 cities in July 2022. Home prices dropped 0.2% and 0.4% in tier-two and tier-three cities respectively, official data showed.

Empty unsold buildings were made to be demolished as builders could not sell and property tax was mounting. Videos of demolishing big towers in China were circulated in social media and in authorised media of China.

What was the problem? It was nothing less than the Sub Prime crisis in the USA, where the investors of Mortgaged Backed Securities started liquidating the investment on the pretext of bad loans. The victim was Lehman Brothers and many non banking financial institutions including some famous REITs. Similarly in China too, the loans were refused to be served by the home loan borrowers as the builders could not complete the projects in time and had manipulated the funds from the operations and sales.

“Short term borrowings and long term investments” is the perpetual bad habit of the real estate players. A new trend has emerged as “the profits are withdrawn first” at the starting point of the project.

Will RERA in India help? To the extent yes. Because of two reasons. First: no project can be sold without first registration with RERA, this will take away the joy of selling the projects before launch, “pre launch”. It discourages the investors to reduce speculations. Secondly: A prescribed rule in the RER Act 2016 is for 70% of the receivable must be deployed in the construction of the said project.

The customer behavior in India is extremely different then of China or European countries. Here, “Home” is just not an asset but it has sentimental values. The home borrower, unless in distress, will keep the payment of EMI on its highest priority. The default rates and industry standard NPA has been below 2% since 2003. It may vary lender to lender as per their credit policies and exposure to risk while distributing loans.

China’s home loan market is different from that of India. The state owned agencies decide the credit policies and MCLR. Whereas the open economy of India has deregulated the MCLR long back. RBI puts a suggestive lending and REPO rate. Every bank and financial institution has its own minimum lending rate structure and add-on as per the risk and credit score of the borrower.

But a big lesson must be learnt from China is when things go into litigation, the borrower wants to stop the EMI, which he does instantly and make the bank a party specifically when there is a subvention scheme.

It will be a difficult proposition for the banker to recover the major part of the loan from builder and borrower when builder defaults and does not pay pre EMI as promised in tripartite agreement, and borrower limits himself to the amount paid in subvention scheme.

The Subsidy scheme is nothing but the borrower gives guarantee to construction loan taken by the builder. In this, when the builder fails, the borrower is solely responsible even though the builder has taken the entire money as construction loan.