Banks seek SC clarity on loans against uncertified ancestral properties
New Delhi, Jan 17, 2025
Banks' move comes in response to a recent Supreme Court ruling that mandates financial institutions to only sanction loans against properties if the borrowers present valid certificates
Several banks are gearing up to approach the Supreme Court to address a new hurdle in property-backed lending, The Economic Times reported on Friday. This move comes in response to a recent Supreme Court ruling prohibiting loans against properties lacking completion and occupancy certificates (CCs and OCs), which has raised concerns for situations involving older properties that often lack proper certifications.
Supreme Court’s ruling on CCs and OCs
Last month, the top court mandated that financial institutions can only sanction loans against properties if the borrowers present valid CCs and OCs. These certificates ensure that a building complies with safety, legal standards, and the approved construction plans. While the ruling aims to protect public interest by ensuring property safety and regulatory compliance, it has posed significant challenges for banks.
Older buildings lack certificates
The ruling complicates lending against older buildings, ancestral properties, and heritage structures that typically do not have these certificates. Moreover, several Indian states do not issue OCs, adding to the issue. Given the importance of loans against property (LAP) as a financial product, banks are now seeking clarity from the Supreme Court on how to proceed.
Uncertainty around properties under construction
Another concern is whether the ruling affects lending against properties under construction, as CCs and OCs are only issued upon project completion. Banks and non-banking financial companies (NBFCs) are awaiting a clear stance from the court to avoid potential legal ambiguities.
According to the report, some top private and state-owned banks have already escalated the issue to the Indian Banks’ Association for guidance. The industry is considering legal avenues, including filing applications with the Supreme Court to seek clarity or modifications to the ruling.
LAP has become a vital financial product, particularly for small and medium enterprises seeking business loans. For NBFCs, small-ticket LAP advances constitute over 60 per cent of their business loans, while for banks, LAP loans make up around 15-20 per cent of their home loan portfolios. These loans are preferred for their secured nature, especially in light of rising defaults in unsecured lending.
To comply with the new ruling, banks may require undertakings from borrowers and builders to provide the necessary certificates. Failure to furnish these documents could lead to loan recalls.
However, considering the diverse circumstances where CCs and OCs may not be available, banks hope for some discretionary leeway in their lending practices.
[The Business Standard]
