Leading banks and non-banking financial companies (NBFCs) are planning to approach the Supreme Court to seek clarity and possible relaxation of a recent ruling that bars lending against properties lacking Completion Certificates (CC) and Occupancy Certificates (OC).
SC Ruling and Its Impact
The Supreme Court’s decision, which aims to ensure regulatory compliance and safeguard public interest, has created significant challenges for the banking sector. Under the ruling, banks and NBFCs cannot provide loans against properties that do not have CCs and OCs, which certify legal construction and compliance with safety standards.
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Banks’ Concerns and Challenges
- Restrictions on Lending: Many properties, including old buildings, ancestral properties, heritage structures, and even luxury hotels, do not have CCs or OCs, making them ineligible for loans.
- State-Level Variations: Some states do not issue OCs, adding further complications.
- Under-Construction Projects: The ruling does not clearly address whether loans can be given for under-construction properties, where CCs and OCs are issued only upon project completion.
- Impact on Loan Against Property (LAP): LAP loans are made use of a lot by small businesses and Individuals, They get impacted almost entirely. Over 60% of the small business lending by NBFCs is done with the help of LAP loans, whereas banks predict a 15-20% share of LAP in their home loan portfolio.
Legal Action and Industry Response
- Supreme Court Appeal: Indian Banks’ Association (IBA) has decided along with other major banks that they will make an application against the ruling in hopes to get more explanation.
- Possible Workarounds: In order to overcome this, certain banks may expect their borrowers and builders to give them an undertaking to secure the CCs and OCs afterwards, this however creates issues surrounding enforcement.
- Risk of Defaults: With a smaller number of properties allowed as collateral, there are fears of increased unsecured lending to result in higher defaulting rates and eventual strains on the NBFC sector.
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SC’s Stand and Next Steps
The Serving Court held that a lender must ensure that CCs and OCs are made available by their clients before they disburse any loan, and that if they do so they will be in contempt and be prosecuted. Such certificates are to be obtained from directors before properties are given by builders.
Considering the possibility of disruptions in property backed financing, the banking sector is now looking for some legal measures to prevent a downturn in the real estate market. In the upcoming weeks, we will see if the SC offers some clarity in regard to this or continues to take a firm stance over loan security compliance.
