Update: Real Estate Regulator Fixes 10% Interest On Delayed Projects

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The Real Estate Regulatory Authority in Madhya Pradesh has prescribed the rate of 10 per cent for delayed projects during the period of delay. Projects will be registered with RERA only if the developer agrees to this provision. The prescribed rate of 10 per cent is two per cent higher than SBI’s Marginal Cost of funds-based Lending Rate (MCLR).  Other state regulators are also considering MCLR plus 2 per cent as the criteria to decide the penalty rate. Therefore, real estate developers would have to pay 10 per cent on the home buyer’s invested amount. An equal rate is applicable on homebuyers, who delay payments and dues from their end.

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In a move that will help bring down delays in the delivery of real estate projects, the government might soon impose a definitive penalty on developers for delaying projects in the Union territories without legislatures. In its draft rules published on June 24, the Ministry of Housing and Urban Poverty Alleviation (HUPA), which makes rules for the Union territories that do not have their own legislative bodies, has proposed an 11.15 per cent interest on developers for missing deadlines.

HUPA will later share the draft rules with the Union urban development ministry, which will notify rules for Delhi and other states to adopt. The Union territories without legislative bodies are Andaman & Nicobar Islands, Chandigarh, Dadra & Nagar Haveli, Daman & Diu and Lakshadweep. 

What do the draft rules say?

According to the draft rules, on which the government has invited public opinion by July 8, developers will have to pay interest at a rate two percentage points higher than the prime lending rate set by State Bank of India. SBI's prime lending rate for retail loans stands at 9.15 at present, so a developer will have to pay the buyer 11.15 per cent interest in case his housing project is delayed. If there is a default from the buyer’s side, he will be liable to pay the same interest to the developer. The draft sets a timeline of 45 days for refund of the amount.

What is the rationale behind the move?

Coming two months after 69 of the 92 Sections of the Real Estate (Regulation and Development) Act, 2016, getting implemented, the draft rules seem to be aimed at bringing more accountability into the real estate sector by clearly defining the liabilities of all stakeholders.
The move to impose an 11.15 per cent interest of erring developers is expected to put a check on project delays, which have been a cause for discontent among home buyers across India and have had a huge negative impact on the market sentiment. In fact, project delays and cancellations have been cited as the major reasons for the slowdown India's real estate market has witnessed in the past couple of years.
As stated in the Real Estate Act, developers will have to register themselves with the Real Estate Regulatory Authority (RERA) and will have to take consent of 70 per cent of the home buyers to make any changes to an approved building plan. To make the property business more transparent, developers will also have to give the RERA every detail of their past and present dealings. 

How will the new rules help?

Consumer is the king, and if they turn their backs on a particular market, any revival for the said market is not possible till the consumer is happy again. And, India’s real estate has been no different. Even as property prices touched new peaks in the past decade, project delays by developers remained a drag on the sector. Stuck between money crunch and long waits, home buyers gradually started getting disgruntled and putting off their home-purchase plans. What followed was a two-year-long slump. Mindful of this, the government and developers are making every effort to get buyers back to the market. The proposed move to impose a penalty for delayed project is expected to go a long way in bolstering investor and consumer confidence in the real estate sector.