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RERA impact: Banks seek higher collateral from developers

While builders are in a bind as the Real Estate Regulation Act (RERA) restricts use of funds, banks are worried about loan accounts turning into NPAs.


Both private and public sector banks are demanding more than the usual collateral on loans sought by the real estate builders. While builders are in a bind as the Real Estate Regulation Act (RERA) restricts use of funds, banks are worried about loan accounts turning into non-performing assets (NPA).

The banks are concerned that the new law would affect disbursement of real-estate loans and reputed banks such as State Bank of India and ICICI Bank are seeking additional collateral clause to ensure security. The banks, in some cases, are also asking for borrower’s private property as guarantee, the Economic Times reported.

Under the new Act, the real estate developers are expected to deposit 70 percent of the allottees’ money to a dedicated bank account. The rest 30 percent can be used for other purposes as against the 100 percent that was allowed earlier.


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Thus, lenders will not have any access to the 70 percent of sales proceeds, making it unqualifiable as collateral.

Industry experts are also anxious about projects getting stalled under the provisions of RERA, the report said. Banks have invested in many projects with a buyback guarantee or a clause allowing them to convert debt to equity and take over the project partially.

Also, holding costs for builders have risen as the option for pre-launch and such advertisements is not allowed under RERA before registration of property. All commercial and residential projects having land area over 500 sq metre or eight apartments, will have to register projects with the real estate regulator before launching them.

Large borrowers account for 86.5 percent of  gross NPAs of scheduled commercial banks, as per RBI’s Financial Stability Report of 2017. Slow velocity in sales, mainly owing to high prices of apartments, have also resulted into large inventories sitting idle with the builders.

According to reports, the Central Bank of India had issued a public notice to the Housing Development and Infrastructure (HDIL), a major real-estate developer, in June over non-payment of loans.

Recently, National industry lobby Assocham said that the real estate sector was stressed over NPA deadlines. The number of incomplete projects keeps growing owing to shortage of funds, and the 90-day limit for non-payment of interest do not give any window for developers to revive a stressed enterprise.

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First Published on Jul 4, 2017 03:08 pm
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