How Transparent are Mortgages in India
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Property has always been an attraction for both individuals and businesses as a long term investment option. In India, mortgages have been an integral part of real estate growth since the last three decades. Banks collectively have an estimated $2 trillion exposure to real estate through various loans—home loans, LAP, LRD and business loans.
At the same time, it is now a known fact that non-performing assets (NPAs) in the banking sector have seen a jump in the last two years with multiple level defaults. The chart below shows that the bear is out of the closet but is not a full representation of the problem:
While the lending process is fairly robust before disbursal, 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:
- Simple mortgage – charge creation without taking possession with the borrower obliged to repay debt
- Equitable mortgage – charge creation through the deposit of the original title deeds without taking possession with the borrower obliged to repay debt
- English mortgage – charge creation without taking physical possession but creating a charge with the sub-registrar of records. In the event of default, the lenders have the right to take possession till the debt is not repaid
The most secure mortgage option practiced by the banks, who are also the biggest beneficiaries, is “equitable mortgage”. However, when you do a title search of the property, it doesn’t show in the sub-registrar record. This creates room for self-disclosure by the borrower in the event of sale or lending.
There are several risks involved in buying such a property in a secondary market. Buying in a primary market (buying from the developer) shows that the receivables, if any, are not fully secured to the lender and needs enforcement procedures. Also, the statutory obligations like property tax and maintenance are not regulated in any manner creating loss to the exchequer and many other local amenities provider.
The other two mortgages—simple and english—when created show in the sub-registrar records and have better search and enforcement procedures. But, the devil lies in how stamp duty is paid for these mortgages/loans. For example, simple and english mortgages are 0.5% or with a capping of Rs 10 lakh in the state of Maharashtra, whereas the equitable mortgage is 0.2% provided it is registered with sub-registrar. With a larger number of home loans 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 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 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. However take note that while LLP, Public Ltd and Pvt Ltd are covered, partnership companies are still are out of the fray.
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 and 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 and buyers but also for the value of the property, which becomes stressed due to the default by the borrower.