RBI say: builders must disclose names of banks they have mortgaged their land & apartments

Once again the Reserve Bank of India (RBI) has issued a master circular on housing finance that builders should publicly disclose names of the banks they have mortgaged their land and apartments too. Earlier also, RBI had issued the similar circular but none of the developers have done this so far, said market sources.

In the circular RBI has instructed banks granting loans for housing projects to ensure that builders or construction companies disclose in pamphlets, brochures and advertisements in news paper whom they have mortgaged their property to. The circular stated, "The builder will indicate in their pamphlets/brochures that they would provide no objection certificate/permission of the mortgagee bank for sale of flats/property, if required."

Sunil Mantri, president of the Maharashtra Chamber of Housing Industry said, "We must honor this stipulation. There should be no harm or difficultly in doing so. There have been complaints that the flat buyer was not aware about the mortgage. This rule will bring more transparency."

Generally builders mortgage their land to get construction loans, and this fact is not disclosed to the consumers when they book flats in such projects. However, sources said most of the builders have not been publicizing these details.

The industry sources say, builders issue allotment letters to flat purchasers even when the flats are mortgaged to banks and financial institutions by the builder. A property expert said, "The buyer has no clue about this because the developer never divulges this information."

He said, "The money paid by the buyer has to go into the account of the bank from whom the loan has been taken by the builder. In most cases, the builder puts this amount into his own bank account without informing the lender bank, this tantamount to a double sale. Every builder is doing this."

In the circular RBI has instructed banks not to release funds if builders do not comply with this directive. Earlier the Bombay High Court had said that banks giving finance to housing 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". According to expert’s builder defaults in repaying the bank after the flats are sold and the building occupied, on the other hand bank can take over a portion of, a garden plot in the society. Also the society might find difficulty in getting the land conveyed in its name.

The RBI has also warned the banks to restrain from "excessively risky lending by exercising selectively and strengthening loan approval process". It said, "Banks should ensure that borrowers should have obtained prior permission from government/statutory authorities for the project, wherever required. While the proposals could be sanctioned in normal course, the disbursements should be made only after the borrower has obtained requisite clearances." As per figures, in India total loans taken by builders amount to over Rs 90,000 crore.