No Loan to Builders who are not registered under RERA

Ashish M. Shaji

17 Dec, 2020

RBI has directed all banks not to provide loans to real-estate players who are yet not registered under RERA. This will encourage the real-estate player to understand the requirement of RERA Registration. In this article we will look at this news in detail.

What is the decision of banks?

• In consultation with Reserve bank of India (RBI^[1]), banks have decided not to extend loans to those projects which have not been registered under RERA. Banks have also sought for additional collateral, including, on personal properties of promoters as a guarantee while disbursing loans to real estate developers.
• As per the new law, Real Estate (Regulation and Development) Act, 2016 (RERA), a developer will have to maintain 70% money collected from homebuyers in a separate account which would leave them with only 30% of the sale proceeds to use for any other purpose, as opposed to 100% which was available earlier.
• For states where RERA has been implemented, real estate loans will be sanctioned only after getting the registration number is issued by the regulatory authority.
• The Act came into force on May 1, 2017, but very few builders have registered under the Act so far. The aim is to get builders to register as RERA improves transparency in real estate sector and protect home buyer’s interest, builders are expected to disclose project-related information, including project plan, layout, and government approvals related information to prospective customers.

Why this decision has been made to not provide loans to builders who are not registered under RERA?

As per a report, an official from PSU bank stated that RERA protects home buyer’s interest however it doesn’t secure banks’ credit. If a builder commits fraud and loan turn bad then there is a provision in the interest of customers but no protection is there for banks with respect to loan granted. Therefore this decision had to be taken.

Bank Guidelines for Sanctioning of Loans

• Banks have decided not to extend loans to those projects which have not been registered under RERA.
• Monitor regularly whether the promoter has deposited 70 percent of the amount realized for real estate project with RERA.
• The promoter could withdraw the amount to cover the cost of the project in proportion to the percentage of completion after it is certified by an engineer, an architect, and chartered accountant.
• The promoter has to get his accounts audited by a chartered accountant within six months after the end of every financial year.
• For ongoing projects wherein the loan has been partially disbursed or the project is already approved prior to May 1, 2017, bank officials have to ensure that the project is compliant and also that the registration number is obtained by July 31, 2017.
• If the builders fail to get registered under RERA then buyers will also not get a loan from the Bank. Hence, buyers will have to make sure that the flats, for which they are applying for a loan from a bank, are registered with RERA.

Conclusion

Under RERA, there are fines and penalties that are prescribed, if a developer doesn’t comply with delivery guidelines or if a builder is not registered under RERA before dealing in Real Estate. In case you have any query related to RERA Registration, contact Enterslice.

Read our article: Statutory Provisions of RERA: Registration Process, Documents, Offences, etc.