UP-RERA plans to approach RBI on project disbursals

The Uttar Pradesh Real Estate Regulatory Authority (UP-RERA) has said it plans to approach the RBI after developers complained that banks aren’t disbursing project receivables for construction, a step that will lead to delays in home delivery.

National Real Estate Developers Council (NAREDCO) had recently raised the issue of banks not allowing developers use of project receivables for projects as per the RERA norms and multiple projects getting stuck due to funds paucity.

“We have held discussion with the developers and will write to the Reserve Bank of India (RBI) this week. The RERA act should be followed in such cases,” said Rajive Kumar, chairperson, UP RERA.

Section 4 of the RERA Act stipulates that 70 % of the money collected by the promoters from the allottees of the project will be kept in a separate account of the project (escrow account) and will be utilised for the purpose of construction of the project and payment towards cost of the land of the project.

“Some of the banks are deducting EMIs from that account, which is against the act. That money is meant for construction only and banks can only deduct from the remaining 30%,” said RK Arora, president of UP chapter of NAREDCO.

According to Pankaj Bajaj, President, CREDAI NCR, a few NBFCs have been deducting EMIs from project receivables in projects which are not recording healthy cashflows.

“Though it helps the NBFC to recover some money in the short term and perhaps avoid reporting NPAs that quarter, it is very unhealthy for the project. In the absence of payments to contractors and suppliers the project will inevitably grind to a halt,” said Bajaj.

Builders say that customers stop releasing further payments and the project goes into a downward spiral.

“There are many instances of projects in NCR having been stalled by lenders because of their stranglehold on the escrow account,” Bajaj added.

And the cashflow constraint hits everyone involved in the project- the buyers, vendors, the builder, and ultimately, the lender also ends up on the losing side.

Directions from RERA mandates that the promoter will maintain three accounts for the project – collection account escrow account and transaction account.

“The step taken by the banks to deduct EMIs from the 70% earmarked for use in construction activity will lead to a shortage of funds for the developers. The government has to come out with directives and guide the banks to deduct the EMIs from the 30% part of the amount which is not for construction,” said Prasoon Chauhan, Founder & CEO, Black Opal, an asset management firm.

All the payments from the homebuyers have to be received in the collection account from which not less than 70% of the amount will be auto transferred by the bank into a separate account of the project and likewise not more than 30% of the money will be transferred to the transaction account of the project to be used by the promoter for expenditure other than the construction and land cost of the project.