Transparency in Mortgages in India
Property has always attracted individuals and businesses not only for being one of the necessities but also a long term investment. Mortgages are a very integral part of the real estate growth since last 3 decades. Banks today collective will have an estimated more than $2 Trillion exposure to real estate through a various loan - home loans, LAP, LRD and business loans.
It is now a known fact that the NPAs are shooting for the last 2 years with multiple level defaults, the below data suggest that the bear is out of the closet and seems this is not a full representation of the problem yet:
While the lending process is fairly robust before disbursal in India, the security creation is not completely fool proof and has a long and tedious enforcement process. Before that one should know the kind of mortgages in India:
a.Simple mortgage – charge creation without taking any possession with an obligation of the borrower to repay debt
b.Equitable mortgage – charge creation through the deposit of the original title deeds without taking possession with an obligation of the borrower to repay debt
c.English mortgage – charge creation without taking physical possession but creating a charge with the sub-registrar of records. And in the event of default the lenders has the right to take possession till the debt is not repaid
The most secure mortgage practiced by the banks who are the biggest beneficiaries is “equitable mortgage” but one will be surprised to know that when anybody does a title search of the property it doesn’t show in the sub-registrar record, creating room for a self-disclosure event by the borrower in the event of sale/lending. While there are so many risks to anybody buying this property in a secondary market, in a primary market sale (buying from the developer - there are so many cases of double selling in the country). A closer look also suggests that the receivables, if any are not fully secured to the lender automatically and needs enforcement procedures. Similarly the statutory obligations like property tax and the maintenance is not regulated in any manner creating loss to the exchequer and many other local amenities provider.
While the other two mortgages when created (Simple & English) shows in sub-registrar records and has better search and enforcement procedures.
The answer lies in how stamp duty is paid for these mortgages/loans. While simple and English mortgages are 0.5% or with a capping of 10 lacs in the state of Maharashtra for example, the equitable mortgage is 0.2% provided it is registered with sub-registrar. With a very larger number of home loan and other property led loans disbursed one can only wait and watch how these loans will be recovered.
The below data from the sub-registrar of records in Mumbai and Delhi suggest how a very small number of loans records are registered and available in the public domain which definitely brings transparency to this sector under high-level scrutiny.Due to a very sharp increase in NPAs, dual sale or mortgage and low enforcement in 2016 RBI through a regulation made it compulsory for banks to disclose loans given to individuals in CERSAI making it a repository of loans. The business loans if under a company are declared by the borrower/possible followed by the lender in the registrar of companies. Pls note while LLP, Public Ltd and Pvt Ltd are covered, the partnership company still are out of the fray for some reason.
For high-level transparency and fair monitoring processes in all records related to real estate mortgages to any lender type (individual/companies) a central repository of all loans with their accurate principal balance, interest paid, interest unpaid, statutory non-payments needs to be created with fixed stamp duty and enforcement guidelines. This is not only necessary to protect the existing or new lenders & buyers but also for the property overall value which becomes stressed for the baggage carries due to the default by the borrower.
By - Mr Anand Moorthy, Founder and CEO, Props AMC.