The Karnataka High Court has issued a judgment prohibiting PNB Housing Finance Limited (PNBHFL), promoted by the government-owned Punjab Bank, from using coercive means to recover money from borrowers who had entered into tripartite agreements after making reservations for apartment units with the Bengaluru-headquartered Mantri Developers under the builder’s ‘Pre-EMI Scheme’.
What is the order?
The court on September 14 ruled that the homebuyers are not required to repay the remaining loan balance under the tripartite agreement for cancelling or withdrawing their reservations for apartments due to an excessive delay in construction.
“If the Borrower desires to withdraw and/or in case of death of Borrower and/or if Borrower fails to pay the balance amount representing the difference between the loan sanctioned by PNBHFL and the actual purchase price of the said property, the entire amount advanced by PNBHFL will be refunded by the Developer as agreed in the Agreement of Sale and Agreement of construction after deduction of cancellation charges to PNBHFL forthwith,” justice Krishna S Dixit said in the written order.
How does it help homebuyers?
This order comes after the developer failed to deliver the apartments in time to about 500 homebuyers in 2016-17. The buyers had booked units in 2012 onwards after paying a booking amount of 10 percent under the subvention (pre-EMI scheme). As per the scheme, the developer was to pay interest to PNBHFL for three years on behalf of the buyer. However, after the handover of the apartment, the buyer was to resume the standard equated monthly instalment (EMI) payments.
However, homebuyers said after several months the developer had stopped paying the interests, and after the promised delivery date lapsed, PNBHFL started taking coercive steps against the homebuyers. After September 2021, the buyers filed writ petitions (that were later clubbed) before the Karnataka High Court seeking relief from the lender’s actions.
Reacting to the order, homebuyers said that this is the first instance in which they have been protected from banks’ actions and builders have been required to pay the bank for delayed projects without putting flat purchasers at a disadvantage.
Why did homebuyers approach court?
Even after filing multiple cases with the state real estate regulatory authority (RERA), the developer had failed to pay up and PNBHFL started sending notices to the homebuyers.
The buyers claimed that funds were disbursed directly to the developer without first determining the status of the work (the payments were meant to be construction-linked meaning that it depended on the status of the project), whereas the PNBHFL asserted that payments were carried out per their orders.
At this point, 30 homebuyers decided to approach the Karnataka High Court arguing against the forceful actions from the bank’s end.
Advocates Srinivas V and MD Rajkumar, who argued for the homebuyers, said this is a problem that has been prevalent across the state for several years. “Earlier, Housing Bank (the regulatory body for housing finance companies) had issued several circulars regarding such subvention schemes, guidelines that have not been met here—neither by the bank nor the developer,” Srinivas said.
Advocates say the loan was disbursed in violation of a Reserve Bank of India (RBI) circular that instructs banks and housing finance organisations to determine the stage of construction before disbursing any funds to the developer.
What did the high court say?
At the high court, PNBHFL continued to argue that both buyers and the developer were liable to repay the loan amount.
However, the court ordered TransUnion CIBIL, RBI and PNBHFL to review the petitioners’ request to re-evaluate their CIBIL ratings, a measure of creditworthiness, and issue no-dues certificates. It also ordered Mantri Developers to abide by RERA decisions, asking the developer to reimburse the complainants for their contributions and pay off any loans taken out in their names.
Why is the order important?
Srinivas said, “Until this order, a writ petition could be invoked for contractual obligations. Other remedies like civil courts and consumer forums can deal with recovery and damage, but cannot deal with bank loans per se. Coming from a top court in Karnataka, this will definitely set precedent for thousands of homebuyers in the state.”
What is a Pre-EMI Scheme?
Under a pre-EMI scheme, a tripartite agreement is executed between the builder/developer, the bank and the buyer. It mainly targets buyers who wish to avail home loans for purchasing a property from builders. On opting for a subvention scheme, the buyers are required to pay 5-20 percent of the total price to the developer/builder at the time of booking the property.
Mohan Pulliah, one of the homebuyers who had filed the writ petition, said, “This was a tripartite agreement between the bank, the developer and the homebuyers. I booked an apartment and a loan was initiated in my name. I used to pay 20 percent of the money to the bank and the builder was to reimburse me the following month.”
Pulliah says the Pre-EMI Scheme was valid for three years after which the developer was to hand over the apartment and the homebuyer had to take on the EMI burden. However, before the handover, if the homebuyer decided to exit, the builder was obligated to return double the money originally invested to the buyer.
Rajkumar said the developer initially reimbursed homebuyers but stopped paying after some years.
After the promised handover date, unhappy with the construction status, the homebuyers decided to exit. Pulliah added that they had sent a notice to the developer and also to PNBHFL.
Pulliah said, “After 2017, despite several requests to the developer, I did not get the investment back. After paying the EMI till 2020, several homebuyers stopped paying the EMIs and started filing RERA cases.”
Soon, PNBHFL started sending notices to homebuyers for collecting the pending EMIs. “Our CIBIL score started getting affected and I was not able to take any loan from elsewhere,” Pulliah added.
Why is CIBIL score important?
While processing a borrower’s loan application, lenders check the person’s CIBIL score. “When the CIBIL score drops, homebuyers will have no way to borrow from banks in India. A good score is above 750, but in this matter, their CIBIL score can drop as low as 400,” said Raghavendra Danti, a banking professional.
Srinivas said even after not getting a home in this particular project, people who wanted to buy another property could not do so because their CIBIL scores were adversely affected and they did not get a bank loan.
A list of questions have been sent to the builder and Moneycontrol will update the copy after receiving the response.