Explained: What is the benefit of rental bonds in India?

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While renting a house in any Indian city is an expensive affair today, it becomes rather difficult when the landlord demands a security deposit equal to 10 months’ rent. This practice is quite prevalent in cities like Bengaluru. This means if the monthly rent for a studio flat is Rs 25,000, the tenant will have to pay as much as Rs 2,50,000 in advance. This deposit is considered as a backup by the landlord to pay for any damage caused during the renting period. Whatever money is left from the advance deposit after clearing the dues is refunded when the tenant vacates the house. This security deposit becomes a huge financial burden, especially for young earners who accept relocating to a new city as a compulsion for employment opportunities.

What are rental bonds?

To dissolve this financial prerequisite before renting a new house, a company called Eqaro Guarantees has launched the concept of rental bonds in cities like Delhi, Mumbai, and Bengaluru. It provides a guarantee to the landlord on behalf of the tenant against factors like unpaid rent, damage to the property, breach of the notice period, etc. This guarantee is issued in the form of rental bonds. It is primarily a tripartite agreement between Eqaro Guarantee, the landlord, and the tenant that eliminates the need for a large inefficient security deposit that the tenant pays to the landlord.

“Rental Bond is a guarantee in favour of the landlord that the tenant will fulfill the obligations under the tenancy agreement. It is issued in favour of the landlord on behalf of the tenant and protects the landlord against any default on the part of the tenant during the tenure of the contract and covers default in payment of rent, damages to the property, breach of lock-in period & unpaid utility bills,” said Vikash Khandelwal, CEO at Eqaro Guarantees.

The company demands financial underwriting of the tenant on parameters similar to what a bank does while lending to a borrower. The tenant is charged 6% of the security deposit as commission to issue the rental bond. While nothing is charged from the landlord, one may wonder if they’d accept the bond as a replacement to cash deposit just yet?

“While rental bonds is a prevalent concept in many parts of the world, it is still at a nascent stage in India. The acceptance, however, is picking up quickly. Rental bonds provide superior coverage than the traditional security deposit. We are now witnessing an increasing number of landlords preferring a rental bond over the security deposit,” Khandelwal said.

Who should opt for rental bonds?

Landlords need protection and have no means of assessing the credibility of the prospective tenant. This has been one of the key reasons for a lot of owners preferring to keep their properties vacant rather than let them out to unverified tenants. Rental bonds hasten the process of building trust between the landlord and the tenant and helps the landlord make his property economically productive without the associated risks. As such, every landlord should opt for a rental guarantee instead of a security deposit.

Benefit for tenant and landlord?

As per a Knight Frank report, there are over 11 million houses lying vacant in India. This is primarily because landlords are reluctant to deal with unverified tenants. Through a rental bond, a landlord gets access to a credit verified and assessed tenant and an institutional guarantee providing him with comprehensive coverage. At the same time, it works for the tenant too!

“For the first time in India, a rental bond provides the tenant with an opportunity to carry forward and reap the benefits of a good tenancy track record on to his subsequent tenancies. Moreover, paying a security deposit can lock up a considerable amount of funds and strain the tenant’s liquidity. Instead, for a small fee a tenant can now move into his/her dream house and use the money for things that are more important to him,” Khandelwal asserted.

Rental bonds have the ability to further popularise the concept of renting business in India thereby reducing the high number of vacant residential units across major cities.

Role of Model Tenancy Act

Meanwhile, on June 2, the Central government approved the Model Tenancy Act (MTA), aiming to bring about wide-ranging reforms, including setting up separate rent authorities, courts, and tribunals in every district to protect the interest of both the owner and tenant. According to an official statement, the act will help overhaul the legal framework with respect to rental housing across the country and the move will boost real estate growth.

“Model Tenancy Act will enable institutionalisation of rental housing by gradually shifting it towards the formal market. It is expected to give a fillip to private participation in rental housing as a business model for addressing the huge housing shortage,” the ministry of housing & urban affairs was quoted as saying.

The act will also enable the institutionalisation of rental housing by gradually shifting it towards the formal market.