Help on way for home buyers facing delays

Written by Arun S | Sunny Verma | New Delhi | Updated: Oct 15 2012, 06:34am hrs
Housing projectsHousing projects
Concerned over the delay in completion of housing projects, the government is considering bringing out guidelines soon to ensure timely handover of dwelling units to buyers.

This follows instances of developers failing to service the loan taken for housing projects with the money collected from buyers and the tendency among many of them to divert loans and the advance amount paid by buyers for creating new land banks or to invest in other sectors for better returns.

To ensure the loans taken by real estate firms do not turn into non-performing assets (NPAs), the new norms will mandate that the developers will have to open escrow accounts for parking funds collected for specific projects. Funds obtained for a particular project wont be allowed to be diverted for other purposes, but used for the specific project they were meant for.

The guidelines are being prepared by a committee under Indian Banks Association (IBA).

Sources said the new system will be enforced through the National Housing Bank (NHB), which will monitor the end use of bank loans to the builders by looking at the cash inflows and outflows as well as periodical statements from banks. The housing sector regulator would supervise the escrow mechanism to ensure that buyers' funds are used for timely completion of the specific project for which the funds were collected.

NHB chairman and managing director RV Verma told FE that though in some cases the developers open escrow accounts even now, the new guidelines will ensure that it will be the norm rather than an exception.

We want projects to be ring-fenced from all external uncertainty and volatility. Several projects have suffered due to developers falling to the temptation to procure more land. This has resulted in some lenders stopping funds to them, he said.

According to officials, the new norms will be end-to-end guidelines and not a statutory requirement. They are meant to enforce greater discipline.

It is learnt that banks were favourable to the proposal of escrow accounts. For small projects, where the lender is a single bank or financial institution, the bank/financial institution will provide periodical statements to the NHB, while for big projects the consortium of financiers undertaking the projects will submit such statements to ensure that there is no diversion of funds.

The developer will have to submit details on the project, its viability, project completion date and the factors that can cause delays. Only if the delay is found genuine would the loan (and its refinance by NHB) be restructured.

The NHB's supervision will also ensure that developers do not resort to clever practises such as setting up a dummy construction company to take out the money from the escrow account (in the name of using it to complete the specified projects) and then divert the funds for other purposes.

The new regime, aimed at catalysing growth in the construction sector, follows a recent meeting between the finance ministry, IBA and the apex body for the country's private real estate developers, the Confederation of Real Estate Developers Associations of India (CREDAI).

Developers have claimed that many residential projects remain semi-complete due to a lack of funds and high interest rates or because they have not been able to find customers to make purchases at the quoted price, especially in tier II and III cities. The finance ministry has already noted the genuine difficulties being faced by builders. It has asked the bankers to hike lending to housing projects, especially those where construction is partially finished and those in tier II and III towns.

The ministry also wanted CREDAI to make a list of unsold and partially completed residential projects so that banks can then give top priority to help in their timely completion.

Sources said the government has been trying to put pressure on developers to make housing more affordable and give a boost to the economy.