Reserve Bank of India has sent out a notification to the banks to not release loans to the real estate developers who have not registered their projects under RERA. RERA stands for Real Estate Regulation Act which was implemented earlier this year and the real estate developers were asked to register their projects under the same, in order to come under regulations.
According to an ET report, banks have been playing the safe game for a few weeks now. ET quoted a bank official saying that the banks are cautious and they are not extending the loans for the projects not registered under RERA. This applies for the bigger developers as well and each of their projects needs to be individually registered under the same.
Along with this, the banks have also gotten keen on attaching more collaterals, including the personal properties of the promoters. These steps are being taken to safeguard the interest of the buyers as well as the banks extending the loans.
Another PSU official, while his interaction with ET, stated that the system has been designed in such a way that it does not protect the interest of the banks. Even if the loan turns bad, the customers get their money returned and there is no mention of the bank. Repeated cases of loans turning bad have resulted in the banks taking extra steps to remain careful.
According to the Real Estate Regulation Act 2016, the banks will have to deposit 70% of the amount collected from the customers in a separate bank account. This means that the developer can use only 30% of the amount collected in the project until the project is completed. Once the project is completed and the customers are given possession, the builder gets access to the deposited amount. In earlier cases, builders could use 100% of the money collected from the customers and that often resulted in rukus when the project get delayed and customers ask for a full refund.
The government implemented the RERA act from May 1st this year and gave 3 months to the developers to register their new and ongoing projects. The deadline to register projects ended on July 31st. The RERA act claims to increase transparency in real estate. One of its clauses has mentioned about disclosing the details regarding project plan, layout, government approvals and other project related information to the customers.
Under RERA, the developers also need the consent of at least two-third of the home buyers before making any big change in the structure or project.
Jaxay Shah, President of The Confederation of Real Estate Developers’ Association of India, or CREDAI stated that the government has initiated this to increase transparency in the real estate sector. While he praised the move, he has also asked the government to speed up the process of registration so that the timeline of builders does not get affected.