(Bloomberg) -- Fifteen miles east of India’s capital lies Jaypee Wish Town, a sprawling 1,162-acre site spotted with unfinished residential towers that embody the human cost of the nation’s bad-loan mess and point to the difficulty of resolving it.
Jaypee Infratech Ltd., Wish Town’s developer, is among the first 12 corporates that the central bank pushed into insolvency court after it was armed this May with new powers to expedite resolution of the nation’s more than $180 billion in soured debt. Hundreds of homebuyers have filed suit saying the loan-recovery proceedings threaten to leave them without homes or compensation, prompting the Supreme Court to halt the case on Sept. 4.
“We are completely at the mercy of the insolvency resolution process,” said Avanish Rastogi, a Lucknow resident, who runs a small hardware business and is a co-petitioner in the Supreme Court homebuyers case. “Whatever is left at the end of giving priority to banks is the only money we can get. I am 53 years old and I have nothing -- neither house, nor savings.”
The Jaypee situation is shaping up to be a test case for the central bank’s push to force the nation’s biggest defaulters to be brought to task under a new bankruptcy code. The challenge of that undertaking has been especially pronounced in the property sector, where recent consumer-protection laws have put thousands of homeowners on a collision course with a national mandate that seeks to clean up a mountain of troubled debts.
Real-estate accounts for about 1.25 trillion rupees ($19.5 billion) of stressed loans with only 17.5 percent recognized as non-performing, according to India Ratings & Research, a Fitch group company. Still, that’s just a part of the problem India Inc. faces. Activity in industries from commodities to textiles and engineering has been hobbled by loans taken in 2007-08, which became hard to service as demand cooled and economic growth slowed to its weakest since Prime Minister Narendra Modi came to power in May 2014.
Numerous efforts to fix the problem haven’t worked and the banking system’s bad-loan ratio has swelled every year since 2009 to rank as the worst among the world’s seven biggest economies. The central bank asked lenders last year to cut their exposures to corporate borrowers by setting provisions for lending beyond a stipulated limit, and last month the capital market regulator directed companies to notify stock exchanges, if they default on a bank loan.
Rastogi is among thousands of buyers who bought homes from developers such as Jaypee, Amrapali Group and AMR Infrastructure, projects that were threatened when a slump in sales forced the indebted companies to slow or halt construction. Some homeowners have turned to the Supreme Court to safeguard their savings as banks invoke a 2016 bankruptcy law to reclaim dues.
This law allows 270 days for a restructuring to be agreed on, failing which it mandates liquidation. Company employees, secured creditors and debts to unsecured creditors get priority over homeowners.
IDBI Bank Ltd. -- a Jaypee creditor that has India’s worst bad-loan ratio -- has asked the top court to lift its stay, saying the order “has the unintended effect of derailing the whole time-bound process envisaged under the insolvency code.” Its plea is due to be heard on Monday.
“The code is still in the nascent stage and one cannot predict everything,” said Manoj K. Singh, founding partner of Singh & Associates, a law firm based in Delhi. Each case has its own set of facts that can give rise to new and unique legal hurdles, he said.
Jaypee declined to comment on the Supreme Court case saying the matter is subjudice. It said in an emailed response to questions that it’s taken “all possible steps” to ensure delivery as per a schedule available on the company’s website.
Rastogi sold his home in Lucknow in 2010 to buy into Wish Town. With his dream home still a 17-floor empty concrete skeleton, he is living on rent. Of 32,000 apartments that were to be delivered by the end of 2013, Jaypee has handed over 6,500, according to court documents.
With his legal options closing, Rastogi and a group of buyers filed a public interest litigation, akin to a class action suit, in the top court. The Supreme Court last week allowed buyers to approach consumer court and invoke a real estate law, complicating the Reserve Bank of India’s job of cleaning up the banking system.
The new real estate law has a provision that it would override all other laws and the Insolvency and Bankruptcy Code also has an identical provision, said Gopal Shankarnarayanan, a lawyer representing several homebuyers before the top court. “You now have a conflict between,” the two.
The Supreme Court has asked India’s Attorney General K.K. Venugopal to help resolve the case and has also sought views from the government and RBI.
A homebuyers association has separately written to the prime minister asking him to change the provisions of the bankruptcy code to give “millions of homebuyers in the lurch” first priority when settling dues “since their stake are very high as their life savings are stuck.”
If the insolvency process for developer Jaypee continues, lawyers expect the bankruptcy code’s 270-day timeline to be met, but are unsure of what lies beyond that.
“The real trouble may begin once the 270 days are over," said Shally Bhasin, a partner at Agarwal Law Associates. “In a couple of years, people will know how to react and what will happen. Right now everyone is going at it mechanically.”