A leading credit rating agency recently introduced real estate ratings, which would benefit the rating agency as well as builders. But what is in it for home buyers, who rely on such ratings and risk their money? In the absence of a regulatory framework for the real estate sector, the rating agency should take the opportunity to develop trust and confidence in builders and provide much-needed protection for home buyers

Credit rating agencies in our country have so far generally restricted their operations mainly to rating of financial products, which is permitted by the regulators, to provide additional inputs to investors that will enable them to make informed investment decisions. One of the leading credit rating agencies in India has recently widened its rating activity, with the launch of graded ratings for real estate projects, with a view to provide credible and authentic information about housing projects to home buyers.

The intention to rate real estate projects appears good. But since it provides a semblance of credibility to projects, and it serves as an additional marketing tool for builders, the information provided by the ratings agency is awfully inadequate, in so far as the home buyer is concerned. The information now available in the rating report is primarily what has already been provided by the builders in their brochures and there appears to be little value addition by the rating agency.

The rating of real estate projects is on a completely different footing compared to the rating of financial products, for the latter is intended to guide people with surplus funds to invest beyond their basic necessities. In fact, the purpose of real estate rating should be to protect home buyers from unfair practices followed by sellers, if any, and to bind the sellers to deliver what they have committed at the time of the sale.

Aside from adding credibility to the builder, real estate rating should also benefit ordinary home buyers, who sink their hard-earned life's savings and large amounts of borrowed funds to realize their dream of having a shelter over their head. The rating agency should, therefore, endeavour to build a bridge between the seller and the buyer and make the transition of transfer of property smooth and hassle-free for the buyer.

In the absence of a regulatory framework for the real estate business, there is an added responsibility on the part of the rating agency to really provide the much-needed comfort to the home buyers, but unfortunately this has not been appreciated by the rating agency so far and precious little has been done to protect the hapless consumer.

With a view to develop credibility in the rating mechanism and to serve the purpose of building a healthy and dependable real estate market, the rating agency should initiate the following steps that could go a long way to revitalizing the real estate industry and render a invaluable service to home buyers.

1. The rating agency should improve its own governance standards first
The rating awarded to a project should not only be fair, but appear to be fair to the outside world. To achieve this objective, the rating agency should constitute an independent rating committee consisting of people with knowledge and competence in this field and they should be in a majority to ensure objective assessment of the projects.

If the rating committee consists only of directors and employees of the rating agency, they cannot be considered to be free from conflict of interest, due to their having an office of profit or interest in the rating company. Though it has been stated by the rating agency that it is dedicated to preserving the objectivity, integrity and independence of ratings, it is neither reflected in its actual implementation, nor is it visible in its actions.

2. Need for transparency in ratings
The rating report neither provides the parameters on which the ratings are based, nor does it specify the criteria on which the stars are allotted. There is a need to present a comprehensive basis on which the ratings are allotted, the methodology followed in arriving at the specific number of stars should be made clear, and the basis on which a project is differentiated-attracting a higher or lower rating-should be clearly spelt out, to enable the buyer to make an informed decision.

3. Certification of claims made by builders
The rating agency should take the responsibility to certify the correctness of claims made by builders, like the quality of construction, the construction area covered vis-à-vis the total land area of the project, the area of each apartment, and such other claims made, and if any statements are at variance with the facts, they should be corrected or brought out clearly in the report.

4. Compliance with national building code
Whether the project complies with the national building code, to the extent applicable, should be clearly mentioned in the rating report. It would be advisable for the rating agency to impress upon the builders to comply with the code, if it is not being followed by them, as it helps to maintain the highest standards of construction expected of them. This should also form part of the rating mechanism to encourage builders to follow the code meticulously.

5. Communication with the homebuyers
The rating agency should maintain a data base of all the buyers of apartments in the projects rated by it and send periodical reports on the progress of the particular project to all these home buyers, which will not only help them to decide on the payment of upcoming installments, but also serve to keep them informed of any problems faced by the builders in the timely completion of the projects.

6. Financial position of builders
A short commentary on the financial position of the builders and their past performance would go a long way towards informing home buyers about the soundness of the builders and the probability of completing the project on time, which is of paramount importance to home buyers.

7. Educating builders about best practices in business
The rating agency should take up the job to educate builders on the best practices in the business, and to lay down benchmarks in every area of their activity, which would enhance the image of the industry and help the players considerably in improving their business.

8. Redressing grievance of home buyers
The rating agency should set up machinery to redress grievances of homebuyers, by constituting an ombudsman whose award should be mandatorily honoured by the builders. Though the ombudsman so constituted may not have legal sanction, it would be a great service to homebuyers if the rating agency could bind builders to honour the award of the ombudsman-through a bilateral agreement with builders whose projects are being rated-and ensure that the system works in the best interest of all the parties concerned.

9. Regulatory framework for real estate business
The rating agency could initiate talks with the authorities concerned to formulate a regulatory framework for the real estate business, and become the forerunner to put the business on an even kneel, giving the much-needed recognition to gain the trust of the home-buying public in our country. This will be a laudable contribution from the leading credit rating agency to the economy and the people.

Can we expect the rating agency to rise up to this challenge? If the rating agency concerned could do all this and more, it could turn out to be a game changer for the real estate business, and will have a far-reaching effect on the generally long-drawn litigation between home buyers and builders in our country.

(The author is a banking and financial consultant. He writes for Moneylife under the pen name 'Gurpur'.)