Bankruptcy code: The problem with treating homebuyers as financial creditors Bloomberg|

11 June 2018: From overburdened assizes to some bizarre interpretations and costly delays, India’s new bankruptcy code has had its share of teething troubles. 
 
But the law, which will decide the fate of $210 billion in bad loans, has also broken new ground. Take the most recent tweak, for instance. Hapless homebuyers left without apartments by debt-stressed builders will have their status raised to that of financial creditors. That’s highly unusual by global patterns. It’s a bold innovation, That’s because the land acquisition is funded by builders’ equity and customer deposits. If buyers are routinely denied both the apartment promised to them and any hope of getting their money back, they won’t bite. That will raise equity financing costs for new projects to discouragingly high levels.
 
The change could end up increasing debt financing costs for Indian developers. Banks may charge more for loans if their recovery rates in the event of insolvency are going to be lower. That would be the case if homebuyers’ cash advances are also treated as senior claims against developers’ assets. Yet superior security for homebuyers may also reduce overall financing costs. That’s because the land acquisition is funded by builders’ equity and customer deposits. If buyers are routinely denied both the apartment promised to them and any hope of getting their money back, they won’t bite. That will raise equity financing costs for new projects to discouragingly high levels.