Builders must admit Land Mortgage: RBI

Mumbai: Potential flat-buyers have cause for cheer. In a move that will help increase transparency in the housing industry, the Reserve Bank of India has mandated that builders must make a public disclosure of land mortgaged to banks—including the name of the bank—in their advertisements, brochures and project pamphlets. They will also have to take the permission/NOC of the bank while selling the flats.

Builders generally mortgage their land in order to get construction loans, a fact that most consumers are unaware of when they book flats in such projects. The RBI’s insistence on a public disclosure will help them make an informed choice.

The RBI circulars, on August 27, 2009 to all scheduled commercial banks, and another on September 14, 2009 to regional rural banks, were sent out pursuant to a recent Bombay high court. ‘Bank can’t attach flat already sold by builder’

Mumbai: The RBI circular to builders to come clean about their land holdings says, “The Bombay high court observed that the bank granting finance to housing development projects should insist on disclosure of the charge or any other liability on the plot, in the brochure, pamphlets etc, which may be published by developer/owner inviting public at large to purchase flats and properties’’.

The RBI further adds that this should be part of the terms and conditions on which banks sanction a loan. It has also advised banks to ensure compliance of these terms and conditions, and said that funds should not be released unless these requirements are fulfilled by the builder.

According to the RBI, the total loans taken by builders from banks in India till May 2009 amount to Rs 94,499 crore.

“This circular will strengthen the rights of flat purchasers and also protect the bank which gives out the loan. The idea is to make sure that the loose ends are tied up,’’ said Supreme Court advocate H P Ranina.

Added an industry source, “The flat purchaser generally does not know the status of the land. If the builder defaults in repaying the loan to the bank after the flats are sold and building occupied, the bank could take over a portion of, say, a garden plot in the housing society. The society may also find it difficult to get the land conveyed in its name. However, the bank is not entitled to attach a flat already sold by the builder.’’

Developer Sunil Mantri said the RBI circular would help streamline the processes. “For instance, say, a developer has taken a construction loan from SBI and a flat purchaser books a flat in this developer’s project and applies for a home loan from LIC.

LIC will make “a cheque in favour of the SBI account of the builder,’’ he said, adding that this way it would be easier for the lending bank to monitor all the receivables.

In July, the RBI allowed banks to extend credit to private developers on commercial terms by way of loans linked to each specific project. Banks could also extend finance to public agencies for land acquisition and development.

SOURCE COURTESY: The Times of India Mumbai. Date: Sep 19, 2009.

-      Adv. R. P. Rathod.