The role of Lender`s Engineer in developer loan approvals
A Little-Known But Increasingly Important Function
The lender's engineer (LE) is a representative of lending institutions such as banks and NBFCs. His function is to audit a project from the technical standpoint when a developer seeks funding for it. This is a process which risk/compliance teams have, over time, hard-wired into funding proposals by developers.
The obvious intention behind this requirement is to identify, mitigate and hedge the lending institution’s risks with regards to the technical aspects of construction.
The key risks include:
- The developer's potential inability to service the debt
- The potential use of the funds for purposes other than what they were allocated for
- Construction progress not keeping pace with disbursement
Currently, the RBI has not mandated any regulations in this regard. The requirement of a Lender’s Engineer is a factor of the risk and compliance parameters of individual lending institutions.
To safeguard the interests of all concerned, lenders have to ensure that the appointed LE has performed a sufficiently detailed review, provided the correct information and reviewed all the construction risks. Meanwhile, there is a recurring question in the minds of developers - what is the value they derive from paying for a lenders engineer? Is the mandatory rubber stamp all that they can expect?
The fact is that they can - and should - derive a lot more value than this from such professional services.
The True Lender Engineer Value Proposition
A knowledgeable, involved and neutral Lender Engineer can bring tangible and definite advantages that go beyond the stamp of approval to the developer's table. The benefits of such a LE's services in terms of project monitoring are, in fact, not limited to providing security to lending institutions - they are also an important component of risk management and value addition for the developer himself.
Backed by sound technical knowledge, the LE plays a vital role in overall project monitoring and coordination by providing steady technical feedback. These inputs can help developers to present a more accurate and convincing picture of the project's progress at construction control meetings.
Also, these expert inputs can help reduce the chances of project failures due to:
- Conflict among the various project participants
- The project manager's lack of information or knowledge
- Indecisiveness among project participants on key decisions
A professional project development and monitoring agency brings in best practices on processes which developers might not have adopted yet, and increased efficiency in the development process will always lead to a better product. Also, proactive identification of risks can lead to better planning / early value engineering, which can subsequently lead to savings upto 10% on the project costs.
It is recommended for lenders to involve a LE at the pre-investment stage, since this will ensure that risks like labour availability, uncovered project costs and overall specification and project cost can be identified in time. This is particularly relevant in light of the fact that new construction technologies are emerging constantly. Both the lending institution and the project developers must aware of these technologies and the cost benefit analysis before they can be leveraged for a more efficient project development.
Social factors like environmental, health and safety practices are factors which require far greater emphasis than they are currently being accorded in the Indian construction industry. Only a neutral, qualified person whose concerns extend beyond mere time and cost savings can provide impartial guidance on these concerns. In these areas, the LE can – by virtue of his function and expertise - is in a position to provide inputs that can have a significant impact.
To illustrate - in the case of a large residential construction, a LE helped a major developer to manage labour attrition by providing value-adding facilities such as on-site crèche and medical aid centre.
What To Look For In a Lender's Engineer
- Ethics is the key quality. Innumerable areas in a construction project can remain invisible to the untrained eye and can only be identified with technical involvement. These areas must not only be brought to light but also brought to the notice of all stakeholders.
- A construction project has various components to success. The technical aspects range from geological factors, architectural design aspects, civil construction and the use of the most efficient mechanical and electrical equipment & services. The appointed LE must be able to understand these complexities and help ensure that the project has the benefit of an optimal mix of architects, civil engineers and mechanical and electrical engineers.
- A technical analysis is incomplete without use of technology. The LE must be proficient in the use of technology to be able to ensure sound risk management and progress mapping.
- The LE must be able to translate technical information into inputs that are relevant to the financial participants in the project – these could include payback period and factors that impact returns.
- The primary scope of a LE includes providing expert insights on the availability and applicability of statutory approvals for a project. The LE must have deep knowledge of statutory aspects and approvals, and must utilize a system to review such approvals through predefined checklists.
For all these reasons, professional Project Management firms with the benefit of global exposure translated into local implementation are best suited to provide Lender's Engineer services.
Current Points Of Dilemma
The appointment of a LE is often a matter of some dispute, since the LE is appointed and paid by the developer but provides the report to the lending institution. Nevertheless, the appointment of a LE is a requirement and all the developer expects to get in return is a stamp of approval. This is a very limited - and, in the case of the developer, self-defeating - way of looking at the whole issue.
The LE needs to be considered as a partner in delivering a better product by both the project participants. This new level of awareness is already being witnessed in the case of private equity investors who have better technical monitoring service providers on board, because they have a stronger say in the project’s overall development process.
At the same time, lending institutions need to have a more scientific basis on which prequalification for lender’s engineers takes place. This will permit professional project management companies with better resources, capabilities, scientific risk analysis processes to provide better data and, above all, higher ethical practices to provide higher value. Lenders, as key project partners, should have a stronger say in identifying their representatives.
This will ensure that the project’s development focuses on a higher quality of real estate products which take into consideration the social aspects of construction - such as safety, health and environmental impact.